Report to Congressional Requesters

United States General Accounting Office 

GAO 

October 2003 MEDICAID NURSING 

HOME PAYMENTS 

States’ Payment Rates 

Largely Unaffected by 

Recent Fiscal 

Pressures 

GAO-04-143 
Recognizing the large share of Medicaid spending that is allocated to nursing 

homes and the importance of spending their Medicaid dollars effectively, the 

19 states GAO reviewed have designed multifaceted approaches to setting 

nursing home payment rates. All of these states base payment rates on 

homes’ actual costs and most develop rates specific to each home. These 

payment methods also generally incorporate incentives to achieve certain 

goals, such as promoting efficiency or encouraging homes to target spending 

toward resident care. States typically update payment rates regularly to 

reflect changes in nursing homes’ costs due to factors such as inflation or 

residents’ changing care needs. 

Although each of the 19 states experienced recent fiscal pressure, states’ 

nursing home payment rates have remained largely unaffected. Any future 

changes, however, remain uncertain. During fiscal years 1998 through 2004, 

only 4 of these states—Illinois, Massachusetts, Michigan, and Texas—cut the 

per diem rates paid to all nursing homes at some point, and in 2 of these 

states, the rate reduction was for less than 1 year. Two other states—

Connecticut and Oregon—also froze nursing home per diem rates for a 

portion of this period. In addition, all 19 states modified the methods they 

use to determine nursing home payment rates during this time, such as 

changing ceilings on payment rates; however, irrespective of shifting fiscal 

pressure, the extent to which states changed specific features of their 

payment methods generally remained constant, with varying effects on 

payment rates to individual homes within states. Further, in over threequarters of these states, nursing home per diem rates grew, on average, by 

an amount that exceeded the skilled nursing facility market basket index, 

the index used by the Centers for Medicare & Medicaid Services to measure 

changes in the price of nursing home goods and services for Medicare, from 

fiscal years 1998 through 2003. Many states were able to avoid making 

significant changes to nursing home payment rates by relying on existing 

resources, such as tobacco settlement and budget stabilization funds, and 

increasing revenue by imposing cigarette or nursing home provider taxes. 

Even with these alternative funding sources and recent temporary federal 

fiscal relief, however, officials in some states suggest that nursing home 

payment reductions are possible in the future. 

GAO received comments on a draft of this report from Medicaid officials in 

the 19 states reviewed, who generally agreed with the characterization of 

their respective nursing home payment methods. GAO also received 

technical comments from representatives of two organizations that 

represent the nursing home industry. 

Almost half of all Americans over 

the age of 65 will rely on nursing 

home care at some point in their 

lives, and two in three nursing 

home residents have their care 

covered at least in part by 

Medicaid. Under Medicaid, states 

set nursing home payment rates 

and the federal government 

reimburses a share of state 

spending. According to the most 

recently available data, Medicaid 

nursing home expenditures exceed 

$43 billion, and total Medicaid 

spending for fiscal year 2003 is 

expected to double by 2012. Such 

projections of increased Medicaid 

spending come as most states are 

confronting their third consecutive 

year of fiscal pressure. According 

to the National Association of State 

Budget Officers (NASBO), in fiscal 

year 2003, 30 states collected less 

revenue than they budgeted for, 

and 37 states reduced enacted 

budgets by almost $14.5 billion. 

In light of concerns about the 

adequacy of nursing home 

resources, GAO was asked to 

examine how state Medicaid 

programs determine nursing home 

payment rates and whether these 

payment methods or rates have 

changed given recent state fiscal 

pressures. GAO interviewed state 

and nursing home industry officials 

in 19 states and obtained 

documentation about nursing home 

payment rates and methods, 

including state methods to 

determine nursing home per diem 

rates for fiscal years 1998 through 

2004. 

www.gao.gov/cgi-bin/getrpt?GAO-04-143.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Kathryn G. 

Allen at (202) 512-7118. 

Highlights of GAO-04-143, a report to 

congressional requesters 

October 2003

MEDICAID NURSING HOME PAYMENTS

States’ Payment Rates Largely 

Unaffected by Recent Fiscal Pressures 
Page i GAO-04-143 Medicaid Nursing Home Payments 

Letter 1

Results in Brief 2

Background 4

State Nursing Home Payment Methods Link Rates to Costs, 

Encourage Efficiency, and Typically Target Funds to Direct 

Resident Care 9

State Fiscal Pressures Generally Have Not Affected Medicaid 

Payment Rates to Nursing Homes, but Future Changes Remain 

Uncertain 17

External Comments 26

Appendix I Scope and Methodology 28 

Appendix II Summary of Certain Payment Characteristics 

Used in Selected States 31 

Appendix III Changes to Nursing Home Payment Methods or 

Rates in 19 States 43 

Appendix IV GAO Contact and Staff Acknowledgments 51 

GAO Contact 51

Acknowledgments 51

Related GAO Products 52 

Tables 

Table 1: Features Found in Medicaid Nursing Home Payment 

Methods in 19 States, September 2003 10

Table 2: Types of Cost Centers and Related Costs Commonly 

Found in 19 States’ Medicaid Nursing Home Payment 

Methods 14

Table 3: Examples of Funding Sources States Reported Using to 

Respond to Fiscal Pressures, 1998-2003 23

Contents 
Page ii GAO-04-143 Medicaid Nursing Home Payments 

Table 4: Existing or Pending Nursing Home Provider Taxes in 13 of 

19 Reviewed States, September 2003 25

Table 5: Study States Categorized by Selection Factors 28

Table 6: Peer Grouping Techniques Used in Reviewed States, as of 

June 2003 32

Table 7: Direct Resident Care, Indirect Care, and Administrative 

Cost-Center Ceilings in Reviewed States with Individual 

Home Rates, as of June 2003 34

Table 8: Direct Resident Care, Indirect Care, and Administrative 

Cost-Center Ceilings in Reviewed States with Flat Payment 

Rates, as of June 2003 36

Table 9: Efficiency Incentives Used in Reviewed States, as of 

June 2003 38

Table 10: Case-Mix Classification Systems Used in Reviewed 

States, as of June 2003 40

Table 11: Occupancy Standards Used in Reviewed States, as of 

June 2003 42

Table 12: State-Reported Changes to Existing Nursing Home 

Payment Methods or Rates, State Fiscal Years 1998-2004 44

Figure 

Figure 1: Average Annual Percentage Change in Average Per Diem 

Rates, by State, Compared to the SNF Market Basket 

Index, State Fiscal Years 2001-2003 21
Page iii GAO-04-143 Medicaid Nursing Home Payments 

Abbreviations 

AAHSA American Association of Homes and Services for 

 the Aging 

AHCA American Health Care Association 

BBA Balanced Budget Act of 1997 

CBO Congressional Budget Office 

CPI Consumer Price Index 

CMS Centers for Medicare & Medicaid Services 

CNA certified nursing assistant 

IOC Inspection of Care 

NASBO National Association of State Budget Officers 

NCSL National Conference of State Legislatures 

NGA National Governors Association 

OBRA Omnibus Budget Reconciliation Act 

OSCAR Online Survey Certification and Reporting 

RUG Resource Utilization Group 

SCHIP State Children’s Health Insurance Program 

SFY state fiscal year 

SNF skilled nursing facility 

TILE Texas Index for Level of Effort 

UPL upper payment limit

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
Page 1 GAO-04-143 Medicaid Nursing Home Payments 

October 17, 2003 

The Honorable Charles E. Grassley 

Chairman 

The Honorable Max Baucus 

Ranking Minority Member 

Committee on Finance 

United States Senate 

The Honorable W.J. “Billy” Tauzin 

Chairman 

Committee on Energy and Commerce 

House of Representatives 

The Honorable John Shimkus 

House of Representatives 

Almost half of all Americans over the age of 65 will rely on nursing home 

care at some point in their lives. Medicaid, a joint federal-state program 

that spent over $43 billion on nursing home services in fiscal year 2001, 

pays at least in part for the care provided to approximately two in three 

nursing home residents. Under Medicaid, states set their own nursing 

home payment rates and the federal government provides funds to match 

states’ share of spending as determined by a federal formula.1

Expenditures for Medicaid nursing home services have grown over the 

past several years and are expected to continue to grow as the baby boom 

generation ages, with 2001 expenditures expected to more than double by 

2012. Projections of such increased Medicaid spending come as states 

faced their third consecutive year of fiscal pressure in 2003. According to 

the National Association of State Budget Officers (NASBO), 37 states 

reduced their fiscal year 2003 enacted budgets by almost $14.5 billion, the 

largest spending cut since 1979, in part due to lower than expected 

revenue collections. 

In view of your concerns about the adequacy of nursing home resources, 

you asked us to examine whether recent fiscal pressures have affected 

 1

The federal share of Medicaid funding varies by state and is based on a state’s per capita 

income in relation to the national per capita income. For fiscal year 2003, the federal share 

of individual states’ Medicaid expenditures ranged from 50 to 76.6 percent, averaging 57 

percent across states. 

United States General Accounting Office 

Washington, DC 20548 
Page 2 GAO-04-143 Medicaid Nursing Home Payments 

how states determine nursing home payment rates or the rates they pay 

homes. Specifically, you asked us to provide information on (1) state 

Medicaid programs’ methods to determine nursing home payment rates for 

services provided to Medicaid residents and (2) how these payment 

methods and rates have changed given recent state fiscal pressures. 

To answer these questions, we interviewed officials from the state 

Medicaid and budget offices, as well as representatives from the local 

affiliates of national nursing home associations, in 19 states.2

 We selected 

these states based on a number of criteria, including overall population, 

Medicaid nursing home residents per capita, and largest decline or 

smallest growth in state tax revenue from 2000 through 2002. From the 

officials we interviewed we obtained documentation, including state laws 

and regulations, on how states determined nursing home payment rates 

(including changes) from state fiscal years 1998 through 2004, as well as 

the average per diem rates states paid nursing homes from state fiscal 

years 1998 through 2003.3

 We conducted our work from September 2002 

through September 2003 in accordance with generally accepted 

government auditing standards. (For additional information on our scope 

and methodology, see app. I.) 

Recognizing the large share of Medicaid spending that is allocated to 

nursing homes and the importance of spending their Medicaid dollars 

effectively, states have designed multifaceted approaches to pay nursing 

homes for the care they provide to Medicaid-covered residents. All 19 

states we reviewed base nursing home payment rates on homes’ costs, and 

over three-quarters of these states develop rates that are specific to each 

home. The 19 states also incorporate various incentives in their payment 

methods to achieve certain goals, such as promoting efficient and 

economical home operations or encouraging homes to target spending 

 2

We originally selected 20 states: Alabama, Arizona, Arkansas, California, Colorado, 

Connecticut, Florida, Illinois, Iowa, Massachusetts, Michigan, New Jersey, New York, 

North Dakota, Oregon, Pennsylvania, Rhode Island, South Dakota, Texas, and Vermont. We 

subsequently excluded Arizona from our analysis because its payment method applies to 

only 5 percent of Medicaid nursing home residents. Costs of care provided to the remaining 

95 percent of the state’s nursing home residents are paid by the state’s managed-care 

program. 

3

We examined states’ methods for determining payment for nursing homes’ operating costs, 

which include the costs of direct resident care, indirect care services (such as dietary, 

laundry, and medical supplies), and administration. Per diem rates for fiscal year 2004 were 

not available for all states. 

Results in Brief 
Page 3 GAO-04-143 Medicaid Nursing Home Payments 

toward direct resident care. For example, to promote efficiency, most of 

these states impose ceilings on the payment homes can receive. States do 

not, however, encourage efficiency to the same degree for all types of 

costs; instead, their payment methods often impose a higher ceiling for 

costs related to direct resident care than to other costs, thus encouraging 

homes to spend more on resident care. In addition, to reflect changing 

nursing home costs due to certain factors, such as inflation, almost all the 

states we reviewed update payment rates annually, often using current 

information on individual homes’ costs. Twelve of the 19 states also adjust 

payment rates based on the care needs or case-mix of a home’s residents. 

These adjustments are intended to further link payments to potential costs 

while encouraging homes to accept residents who require more costly 

care. 

Despite each of the 19 states experiencing recent fiscal pressure, states’ 

nursing home payment rates have remained largely unaffected. Any future 

changes, however, remain uncertain. During fiscal years 1998 through 

2004, only 4 of these states—Illinois, Massachusetts, Michigan, and 

Texas—cut the per diem rates paid to all nursing homes at some point, and 

in 2 of these states the rate reduction was for less than 1 year. Two other 

states—Connecticut and Oregon—also froze nursing home per diem rates 

for a portion of this time period. In addition, all 19 states modified the 

methods they use to determine nursing home payment rates during this 

time, such as changing ceilings on payment rates; however, irrespective of 

shifting fiscal pressure, the extent to which states changed specific 

features of their payment methods generally remained constant, with 

varying effects on payment rates to individual homes within states. 

Further, in over three-quarters of these states, nursing home per diem 

rates grew, on average, by an amount that exceeded the skilled nursing 

facility (SNF) market basket index, which is used by the Centers for 

Medicare & Medicaid Services (CMS) to measure changes in the price of 

nursing home goods and services for Medicare, from fiscal years 1998 

through 2003. More than three-quarters of the states indicated that they 

have forestalled more significant changes to their payment rates by relying 

on alternative funding sources to help balance their state budgets, such as 

tobacco settlement or budget stabilization funds, and increasing revenue 

by imposing cigarette or nursing home provider taxes. Even with these 

alternative funding sources and recent temporary federal fiscal relief, 

however, officials in some states suggest that nursing home payment 

reductions are possible in the future. 
Page 4 GAO-04-143 Medicaid Nursing Home Payments 

We received comments on a draft of this report from Medicaid officials in 

the 19 states that were included in our review, who generally agreed with 

our characterization of their respective nursing home payment methods, 

as well as from representatives of two organizations that represent the 

nursing home industry. State and association officials provided clarifying 

and technical comments regarding nursing home payment methods and 

rates, which we incorporated as appropriate throughout the report. 

Medicaid operates as a joint federal-state program to finance health care 

coverage for certain categories of low-income individuals, over 11 million 

of whom are elderly or disabled.4

 In total, Medicaid cost almost $258 

billion in fiscal year 2002, and the Congressional Budget Office (CBO) 

projects that fiscal year 2003 spending will double by 2012. Today, 

Medicaid ranks as the third largest mandatory spending program in the 

federal budget and represents the largest source of federal funds to the 

states, accounting for 41 percent of all federal outlays for grants to states 

and local governments in fiscal year 2001. In terms of overall state 

expenditures, outlays for Medicaid rank second only to elementary and 

secondary education, accounting for an estimated 15 percent of general 

fund expenditures in state fiscal year 2002.5

Within broad federal guidelines, states have considerable flexibility in how 

they administer their Medicaid programs. The federal statute requires state 

programs to cover certain services and populations, such as nursing home 

services for qualifying elderly and for disabled individuals aged 21 and 

over.6

 Each state determines what medical services to cover, establishes 

eligibility requirements, sets provider payment rates, and develops its own 

administrative structure. As a result, Medicaid essentially operates as 56 

separate programs: 1 in each of the 50 states, the District of Columbia, 

Puerto Rico, and each of the U.S. territories. Nursing homes care for 

people with a wide range of clinical conditions and provide a variety of 

 4

This figure represents 27 percent of total Medicaid enrollment in fiscal year 2000, the most 

recent year for which data are available by type of beneficiary. 

5

National Governors Association and National Association of State Budget Officers, The 

Fiscal Survey of States (Washington D.C.: June 2003), http://www.nasbo.org (downloaded 

June 27, 2003). 

6

In addition to the mandatory services states are required to include in their Medicaid 

programs, states may choose to cover certain optional services, including personal care 

services and physical and occupational therapies. 

Background 
Page 5 GAO-04-143 Medicaid Nursing Home Payments 

services, including basic custodial care, medical social services, skilled 

nursing care, and rehabilitative therapies. Medicaid is the single largest 

funding source for nursing home services, providing about one-half of total 

expenditures for these services in 2003.7

 Medicaid supports the care of an 

even larger share of nursing home residents, paying at least in part for the 

services provided to approximately two in three residents nationwide.8

Federal requirements regarding states’ methods for reimbursing nursing 

homes for the services they provide to Medicaid residents have changed 

over time. A 1972 amendment to the Social Security Act required that 

states reimburse nursing homes on a reasonable cost-related basis.9

 Under 

this requirement, states developed methods to identify nursing homes’ 

reasonable costs as well as set rates based on these costs, both of which 

were subject to federal verification and approval. Nursing home providers 

filed a number of federal lawsuits contesting the adequacy of states’ 

payment rates. 

In 1980, Congress passed legislation, commonly referred to as the Boren 

Amendment, which provided that Medicaid payment rates for nursing 

homes had to be “reasonable and adequate to meet the costs which must 

be incurred by efficiently and economically operated facilities.”10 The 

Boren Amendment also transferred responsibility for verifying that rates 

complied with these standards from the federal government to states; 

however, it did not grant states unlimited discretion in developing 

payment rates. The 1980 Conference Report that accompanied the Boren 

Amendment stated that rates should not be developed “solely on the basis 

 7

According to CMS’s actuarial estimates, national nursing home spending will total more 

than $108 billion in 2003. Medicaid and Medicare will cover about 50 percent and 11 

percent of these costs, respectively, and about 37 percent of these costs will be covered by 

out-of-pocket payments, private health insurance, and other private funds. (These 

percentages do not add to 100 because of rounding.) 

8

Certain Medicaid enrollees, including nursing home residents, are required to contribute 

shares of their incomes to the costs of their care, which in part explains why the share of 

nursing home residents supported in some measure by Medicaid is greater than Medicaid’s 

share of total nursing home revenues. 

9

Social Security Amendments of 1972, Pub. L. No. 92-603, § 249, 1972 U.S.C.A.A.N. 1548, 

1667. Prior to this amendment, there were no substantive federal standards governing state 

payment for nursing home services. 

10Ominbus Budget Reconciliation Act (OBRA) of 1980, Pub. L. No. 96-499, § 962(a), 94 Stat. 

2599, 2650. The Boren Amendment was extended to payments for inpatient hospital 

services as part of OBRA 1981 (Pub. L. No. 97-35 § 2173, 95 Stat. 808 (1981)). 
Page 6 GAO-04-143 Medicaid Nursing Home Payments 

of budgetary appropriations” and required states to submit annual 

assurances to the Secretary of Health and Human Services that rates 

complied with Boren regulations.11 The Conference Report also clarified 

that while the Boren Amendment was intended to give states discretion to 

develop the methods and standards on which payment rates would be 

based, the federal government retained final authority in approving states’ 

rates.12

During the roughly 17 years following the enactment of the Boren 

Amendment, providers in many states filed suits alleging that Medicaid 

payment rates were not sufficient and therefore violated federal 

requirements that rates be reasonable and adequate to cover the costs of 

efficiently and economically operated nursing homes. In 1990, the 

Supreme Court found that the amendment imposed a binding obligation 

on states to adopt reasonable and adequate payment rates and held that 

providers could sue to enforce this obligation and challenge Medicaid 

payment rates in federal court.13 After this decision, nursing home 

providers continued to rely on the courts to review payment rates they 

considered insufficient and verify that these rates complied with federal 

payment standards. 

The Balanced Budget Act of 1997 (BBA) repealed the Boren Amendment, 

providing states with increased flexibility to develop approaches to pay 

nursing homes that participate in Medicaid.14 States are no longer required 

to submit annual rate findings to the federal government but instead must 

develop and implement a public process for determining rates, which 

requires that states publish all proposed and final rates—including their 

methodologies and justifications—and ensure that providers, 

beneficiaries, and their representatives are given reasonable opportunity 

to review and comment on rates.15 Additionally, states must continue to 

 11H.R. Conf. Rep. No. 96-1479 at 154 (1980), reprinted in 1980 U.S.C.A.A.N. 5903, 5945. 

12H.R. Conf. Rep. No. 96-1479 at 154 (1980). 

13Wilder v. Virginia Hospital Association, 496 U.S. 498 (1990).

14Pub. L. No. 105-33, § 4712, 111 Stat. 509 (1997). 

15States may fulfill public process requirements in a number of ways, including holding 

public hearings to disclose proposed rates and payment methods; using an open 

commission or similar process to set rates; or publishing changes to payment methods in 

newspapers of general circulation and making copies of proposed and final rates, payment 

methods, and justifications underlying changes available to the public. 
Page 7 GAO-04-143 Medicaid Nursing Home Payments 

ensure that payments are consistent with efficiency, economy, and quality 

of care standards.16

In 2003, states faced their third consecutive year of fiscal pressure, with 

revenue collections again falling short of planned expenditures. A June 

2003 survey conducted by NASBO and the National Governors Association 

(NGA) found that 30 states collected less revenue in fiscal year 2003 than 

they planned for in their budgets, with sales tax collections 2.5 percent 

lower than originally budgeted and personal and corporate income tax 

collections 8.6 percent and 8.3 percent lower than expected, respectively.17

According to an April 2003 survey conducted by the National Conference 

of State Legislatures (NCSL), 39 states and the District of Columbia faced 

budget shortfalls at some point during fiscal year 2003, totaling over $29 

billion.18

At the same time states have experienced shortfalls in their expected 

revenue collections, they have also experienced significant growth in 

Medicaid expenditures. According to CMS, the state and local share of 

Medicaid spending grew almost 14 percent in fiscal year 2002 and is 

projected to grow almost 10 percent in 2003.19 In their June 2003 survey, 

NASBO and NGA reported that 25 states experienced Medicaid budget 

shortfalls in state fiscal year 2002, and 28 states reported these shortfalls 

in 2003. 

 1642 U.S.C. §1396a(a). 

17NGA and NASBO. 

18National Conference of State Legislatures (NCSL), State Budget Update: April 2003 

(Washington, D.C.: April 2003). 

19The 2002 spending growth is based on Medicaid expenditure data from CMS. Projections 

of increased spending for 2003 are based on calendar year actuarial estimates published by 

CMS staff in Health Affairs. See S. Heffler et al., “Health Spending Projections For 2002-

2012”, Health Affairs, vol. 22, no. 2 (Bethesda, Md.: Project Hope, 2003); 

http://www.healthaffairs.org/WebExclusives/Heffler_Web_Excl_020703.htm (downloaded 

June 13, 2003). The projected increase in states’ 2003 Medicaid spending includes spending 

for the State Children’s Health Insurance Program (SCHIP), which was created under BBA 

to provide health care coverage to children of low-income families with incomes that 

exceed the eligibility limits for Medicaid. 

State Fiscal Pressures 
Page 8 GAO-04-143 Medicaid Nursing Home Payments 

Fiscal pressures have compelled states to confront difficult choices, 

especially because 49 states and the District of Columbia are required to 

balance their budgets.20 Recognizing that the Medicaid program represents 

a large component of many states’ budgets, virtually all states have 

implemented or planned new cost-containment measures in order to 

control Medicaid spending growth in 2003, according to another recent 

state survey.21 For example, 45 states reported that they planned to reduce 

spending on prescription drugs, which is an optional benefit, during fiscal 

year 2003. In addition, benefit reductions, such as limits for vision care and 

dental services, and changes to eligibility requirements, such as a lowered 

income threshold for Medicaid program eligibility, were additional costcontainment measures used or proposed by states. 

In May 2003, Congress passed the Jobs and Growth Tax Relief 

Reconciliation Act, which included $20 billion in fiscal relief to state and 

local governments.22 Of these funds, $10 billion is earmarked for Medicaid, 

providing temporary enhancements to the federal share of Medicaid 

funding through June 2004 to help states maintain Medicaid services and 

eligibility.23 The remaining $10 billion in fiscal relief is divided among the 

states based on population and can be used to assist states in providing 

government services. 

 20Vermont is the only state that is not required to balance its budget each year. See Kaiser 

Commission on Medicaid and the Uninsured, The Role of Medicaid in State Budgets 

(Washington, D.C.: October 2001). 

21See Victoria Wachino et al., Medicaid Spending Growth: a 50-State Update for Fiscal 

Year 2003 (Washington, D.C.: Kaiser Commission on Medicaid and the Uninsured, January 

2003). 

22Pub. L. No. 108-27, 117 Stat. 752, 764 (2003). 

23Temporary enhancements to the federal share of Medicaid funding involve both a “holdharmless” provision that prevents each state’s federal matching rate from decreasing below 

certain levels and an across-the-board increase to federal matching rates for all states. 

Under the hold-harmless provision, states receive the higher of their fiscal year 2002 or 

fiscal year 2003 federal matching rates for the period April 1 through September 30, 2003, 

and the higher of their fiscal year 2003 or fiscal year 2004 federal matching rates for the 

period October 1, 2003, through June 30, 2004. In addition, an across-the-board increase of 

2.95 percentage points is applied to each state’s matching rate as determined under the 

hold-harmless provision for the period April 1, 2003, through June 30, 2004, provided the 

state does not restrict Medicaid eligibility below the levels specified in its state plan as of 

September 2, 2003. 
Page 9 GAO-04-143 Medicaid Nursing Home Payments 

Recognizing the importance of spending Medicaid dollars effectively, the 

19 states we reviewed have designed methods to develop nursing home 

payment rates that include incentives for homes to deliver care efficiently, 

operate economically, and concentrate resources on direct resident care. 

While nursing home payment rates in most of these states are related to 

individual homes’ costs of delivering needed services, most states also 

limit payment for certain types of costs and many provide additional 

payments for direct resident care. Most of these states also regularly 

adjust rates to reflect changes in homes’ costs or in the care needs of the 

residents that homes serve. 

Table 1 provides an overview of various payment features used by the 19 

states we reviewed as of September 2003. These features will be discussed 

below in greater detail. Because states pursue different strategies to meet 

their various objectives, methods to determine rates differ considerably 

among states. However, over half of the states we reviewed include at 

least five such features in their payment methods, with states most 

commonly using payment ceilings and annual rate updates. 

State Nursing Home 

Payment Methods 

Link Rates to Costs, 

Encourage Efficiency, 

and Typically Target 

Funds to Direct 

Resident Care 
Page 10 GAO-04-143 Medicaid Nursing Home Payments 

Table 1: Features Found in Medicaid Nursing Home Payment Methods in 19 States, September 2003 

Rate updates 

State 

Homespecific rates Efficiency 

incentive 

Ceilings or 

flat rate

Peer 

groups

Add-on 

payment 

for direct 

resident 

care

Rates 

rebased 

annually 

Rates 

consistently 

inflated in nonrebase years

Case-mix 

system

Alabama X X X X X X 

Arkansas X X X

California X X X X 

Colorado X X X X X

Connecticut X X X X X

Florida X X X X X 

Illinois X X X X X X

Iowa X X X X X a X

Massachusetts X X X X

Michigan X X X X 

New Jersey X X X X X

New York X X X X X X

North Dakota X X X X X

Oregon X X X

Pennsylvania X X X X X X

Rhode Island X X X

South Dakota X X X X X

Texas X X XbX

Vermont X X c XX

Total 15 7 19 10 9 9 8 12

Source: States’ Medicaid programs. 

a

In Iowa, nursing home payment rates were rebased annually until July 1, 2001, when the state began 

to phase in its new payment method. 

b

Until September 1, 2001, Texas rebased rates annually. Since this time, the state rebases rates 

biennially in conjunction with developing its budget and inflates rates to the midpoint of the 2-year 

period. 

c

Vermont provides an add-on payment to reimburse wages and other expenses for all nursing home 

staff except the nursing home administrator. 
Page 11 GAO-04-143 Medicaid Nursing Home Payments 

All 19 states we reviewed base the per diem, or daily, rate they pay to 

nursing homes on costs, as reported in cost reports. While 4 states—

California, Massachusetts, Oregon, and Texas—use the average or median 

costs of all homes to pay the same, flat rate, with some adjustments, to all 

homes or homes within a specified group, the remaining 15 states compute 

a rate for each home based on the individual home’s costs.24 States that pay 

home-specific rates attempt to make more effective use of their resources 

for nursing homes. They avoid paying lower-cost homes rates significantly 

in excess of their costs, which can occur when rates are based on the 

average or median costs across homes. In addition, by not making such 

excess payments to lower-cost homes, states with home-specific rates can 

use the same overall budget to pay more higher-cost homes rates that are 

closer to their costs. 

States design their payment methods to encourage nursing homes to 

deliver care efficiently and economically. For example, all 19 states 

develop their payment rates prospectively, or prior to the time during 

which the rates apply, using historical cost reports. Prospective rates 

encourage nursing homes to operate efficiently and incur only necessary 

costs.25 Homes that deliver care for less than the payment amount profit; 

conversely, providers experience losses if costs are higher than the 

payment rate. 

Seven of the states we reviewed use explicit efficiency incentives to 

further encourage homes to minimize spending by providing them with 

additional payment if they keep their spending below a certain amount. 

For example, Connecticut nursing homes with indirect care or 

 24In Massachusetts, Oregon, and Texas, payment rates to individual homes are adjusted to 

reflect variation in resident care needs, while California pays groups of similar homes the 

same rate. In addition, Massachusetts pays a small portion of capital costs on a homespecific basis, and from state fiscal years 2000 through 2003, Texas imposed a staff 

compensation accountability requirement for homes to spend 85 percent of their direct 

resident care rate on staffing wages and benefits. Homes that did not spend this limit had to 

pay the state the difference between what they spent and 85 percent of the flat, direct 

resident care rate. 

25Under the alternative, retrospective payment systems, the actual costs incurred during the 

year are paid after the submission and review of a home’s cost report at the end of the year. 

Retrospective systems are recognized as inflationary; consequently, all states we reviewed 

set rates prospectively. However, Michigan performs limited retrospective adjustments to 

the payment rate for individual homes to cover changes in certain costs, such as qualifying 

renovations. 

States Typically Develop 

an Individual Rate for 

Each Home 

States Design Payment 

Methods to Encourage 

Efficient Nursing Home 

Operations 
Page 12 GAO-04-143 Medicaid Nursing Home Payments 

administrative costs below the median of all homes’ costs in these 

categories have up to 25 percent of this difference incorporated into their 

per diem rates.26 (See app. II for more detail on how states develop nursing 

home payment rates.) 

To further encourage homes to operate efficiently, the 15 of the 19 states 

that pay home-specific rates place ceilings, or limits, on the costs that are 

reflected in their nursing home payment rates.27, 28 These ceilings encourage 

homes to control spending as they will not be reimbursed for costs that 

exceed these ceilings. Since the majority of homes have demonstrated that 

they can provide care at costs below the ceiling, states may regard costs 

above the ceiling as excessive. 

In addition to imposing ceilings, many states use other mechanisms to 

limit the costs that they recognize when determining homes’ per diem 

rates. While in some cases these mechanisms may also encourage 

efficiency, in other cases they may result in fewer homes receiving their 

full costs than what the ceiling levels indicate. For example, regardless of 

increasing nursing home costs, Colorado limits the annual increase in 

administrative costs it recognizes to 6 percent, while South Dakota allows 

no more than an 8 percent annual increase in overall payment rates. In 

addition, although Rhode Island and North Dakota rebase their per diem 

rates regularly, they do not rebase cost-center ceilings as frequently. For 

example, Rhode Island inflates cost-center ceilings annually instead of 

rebasing them, and North Dakota rebases ceilings every 3 years on 

average, inflating them during the interim years. (See app. II for 

descriptions of additional limits states place on nursing home payments.) 

To avoid penalizing homes for costs beyond their control, 10 of the states 

we reviewed categorize homes into peer groups and then set ceilings for 

each peer group rather than having a single statewide ceiling for all homes. 

States often establish peer groups for homes in the geographic areas that 

 26Seventeen of the 19 states we reviewed also incorporate occupancy standards, which 

reduce the per diem rate for nursing homes with resident occupancy that is below an 

established level. App. II addresses occupancy standards in more detail. 

27The ceiling is typically based on a percentage of the median costs, or a certain percentile 

of costs, for all homes in the state or within a category of homes. Individual homes’ rates 

are typically determined by the lower of their own costs or the ceiling. 

28In the four states that generally pay a flat rate to all homes or to all homes in a group, the 

flat rate also promotes efficiency since homes with costs below the rate are able to retain 

the difference. 
Page 13 GAO-04-143 Medicaid Nursing Home Payments 

have similar labor markets and associated wage costs or homes of 

comparable size (i.e., homes with a large or small number of beds) that 

should operate at similar levels of efficiency. For example, since costs per 

day may vary by geographic location—such as urban versus rural areas—

establishing peer groups by location allows states to set higher ceilings for 

homes in the more costly areas. Peer groups may be unnecessary in states 

with ceilings that are set well above the median costs and where most 

homes have costs below the ceilings or in states where wages vary little 

across areas. 

Despite the various ways states encourage nursing home efficiency, 

industry representatives and industry-sponsored studies nonetheless raise 

concerns that Medicaid payments do not cover the full costs of all nursing 

homes. For example, a 2002 industry-sponsored study reported that 

nursing home costs for Medicaid-covered residents in 2000 exceeded 

Medicaid payment rates an average of $10 per resident day in the 37 states 

included in the study.29 In addition, industry representatives in 7 of the 

states we reviewed expressed concern that state payment methods do not 

adequately account for increases in certain costs, such as liability 

insurance or direct resident care staff wages and benefits.30,31 However, by 

incorporating certain features, such as ceilings, into their nursing home 

payment methods, states have intentionally designed their payment 

methods so that not all homes receive their full costs and so that lowercost homes, which are more likely to be efficient and economical, have 

payment rates nearer to their costs. 

 29BDO Seidman, LLP, A Briefing Chartbook on Shortfalls in Medicaid Funding for 

Nursing Home Care (July 2002). 

30For example, Texas Medicaid officials examined Texas nursing home cost report data 

from fiscal years 1998 through 2001 and found that average liability insurance costs per 

nursing home bed increased almost threefold, from $207 to $592. Nonetheless, these costs 

represented less than 1 percent of total costs for the typical Texas nursing home in 1998 

and less than 2 percent of the typical home’s costs in 2001. 

31Additionally, industry representatives in six states expressed concern regarding payment 

methods for homes’ capital costs, noting that capital payment may be insufficient for a 

variety of reasons, including states’ use of nursing homes’ historic values, which do not 

reflect homes’ current capital values, when determining payment rates and low ceilings in 

the capital cost center. A detailed analysis of payment methods for nursing homes’ capital 

costs was beyond the scope of this report. 
Page 14 GAO-04-143 Medicaid Nursing Home Payments 

Through the design of their payment methods, states generally seek to 

encourage nursing home spending on direct resident care. All 19 states we 

reviewed divide nursing home costs into categories, or cost centers, with 

common categories being direct resident care, indirect care, 

administrative, and capital (see table 2). By varying their payment policies 

for each category, most states seek to target more of their funds to direct 

resident care.32

Table 2: Types of Cost Centers and Related Costs Commonly Found in 19 States’ 

Medicaid Nursing Home Payment Methods 

Cost center Type of included costs 

Direct resident care Nursing staff salaries, wages, and benefits 

Indirect care Dietary, medical supplies, laundry, social services and activities, 

and maintenance 

Administrative Administrative salaries and expenses and office supplies 

Capital Building and equipment expenses including depreciation, taxes, 

interest, and rent 

Source: State Medicaid programs. 

Note: Indirect care and administrative costs are combined into a single cost center in 8 states and 

separated into two centers in 11 states. 

How states establish ceilings or efficiency incentives for each cost center 

may encourage nursing homes to spend more money on direct resident 

care than other areas. In nine of the states we reviewed that pay homespecific rates, the direct resident care ceiling is higher than the 

administrative ceiling, thus allowing a higher proportion of homes to have 

their payments based on their total direct resident care costs than is the 

case for their administrative costs. For example, for all homes within each 

peer group in Connecticut, the direct resident care ceiling is set at 135 

percent of the median direct resident care costs while the administrative 

ceiling is set at 100 percent of the median administrative costs. In addition, 

five of the seven states with efficiency incentives that reward homes for 

spending less do not apply them to direct resident care costs, thereby 

minimizing the incentive for homes to restrict spending in this area.33

 32The states we reviewed categorize nursing home costs into two to seven centers. 

33In addition, 9 of the 17 states with occupancy standards do not apply these standards to 

the direct resident care cost center, and consequently payment for these costs is not 

limited in homes with low occupancy (see app. II). 

Nursing Home Payment 

Methods Encourage 

Spending in Areas 

Specifically Related to 

Direct Resident Care 
Page 15 GAO-04-143 Medicaid Nursing Home Payments 

Further, nine of the states we reviewed used add-on payments to 

reimburse wages or other expenses for staff who provide direct resident 

care or to promote the provision of high-quality direct resident care. For 

example, in 2000, Massachusetts began providing an add-on payment to 

nursing homes for certified nursing assistants (CNA), who assist residents 

with activities such as bathing and eating. This add-on is based on CNA 

salaries and Medicaid nursing home utilization. Because homes often use 

add-on payments to increase their spending on direct resident care, these 

payments may lead to higher costs on homes’ cost reports and therefore 

could result in higher future per diem rates.34

To reflect changes in nursing homes’ costs, 17 of the 19 states we reviewed 

regularly calculate new payment rates or adjust existing rates for inflation. 

To rebase, or calculate new rates, states generally use costs as reported in 

nursing homes’ most recent cost reports that reflect inflation or other cost 

changes such as those due to more expensive technologies, a different 

staff mix, or changing direct resident care needs.35 Nine of the 19 states we 

reviewed rebase rates annually, and 8 states rebase homes’ rates every 2 to 

4 years.36 The 2 remaining states, however, rebase infrequently, if ever; 

Illinois has only rebased rates once in the past 9 years, and New York has 

not fully rebased homes’ rates since 1986.37

 34Texas allows homes to qualify for additional direct resident care payments through its 

staff enhancement program, in which 92 percent of nursing homes participate. The state’s 

staff compensation accountability provision, which was in effect from fiscal years 2000 

through 2003, provided homes with an incentive to target funds toward direct resident care. 

This provision was eliminated in state fiscal year 2004, which began on September 1, 2003. 

35Frequent rebasing could have mixed effects on nursing homes’ spending. Since homes 

that limit expenditures could receive a lower payment rate when states rebase rates, 

frequent rebasing may reduce the incentive for homes that are paid prospective rates to 

limit overall spending. However, frequent rebasing may also prevent homes from making 

excessive cost reductions that could adversely affect resident care. 

36Arkansas rebases its payment rate using two different schedules: Costs related to direct 

resident care staff and food are rebased every year, whereas costs associated with services 

not directly related to residents, such as administrative costs, are rebased at least once 

every 3 years. 

37New York does, however, rebase the payment for homes’ capital costs annually. 

According to a state official, the effect of rebasing capital costs on nursing home rates 

varies by home; however, in recent years, the capital portion of many homes’ rates has 

declined. 

States Update Payment 

Rates to Reflect Changing 

Costs 
Page 16 GAO-04-143 Medicaid Nursing Home Payments 

Most states we reviewed also apply a standard inflation factor, such as the 

Consumer Price Index (CPI) or the SNF market basket index, to adjust 

rates during years they do not rebase or to reflect inflation between the 

midpoint of the cost report year and the midpoint of the year when the 

rates will be paid, a period that generally ranges from 18 to 36 months.38

However, Illinois has not consistently updated rates for inflation during 

non-rebase years since 1994, and Iowa’s new nursing home payment 

method, which was fully implemented on July 1, 2003, does not have a 

provision for adjusting rates during non-rebase years.39 In addition, rather 

than using a standard inflation factor, Connecticut and Illinois use 

legislatively determined amounts to update rates when they do not 

rebase.40 These amounts vary from year to year and are influenced by 

budget availability. 

Instead of paying rates that are based on the costs required to care for a 

nursing home’s residents during the cost reporting period, 12 of the 19 

states we reviewed use case-mix systems to tie payment to the costs 

associated with a home’s current resident care needs. Using a variety of 

methods, states classify homes’ residents by the level of care they require 

and adjust payment rates to reflect the costs associated with treating 

current residents with different levels of need.41 While the rate adjustment 

occurs with varying frequency, most states adjust rates for case-mix two to 

four times a year. 

Adjusting rates for case-mix may encourage homes to accept residents 

who require more expensive care, and it also provides states with a tool to 

compare more appropriately homes’ costs and to not penalize homes that 

have higher costs due to a more costly mix of residents. In addition, case-

 38The SNF market basket index, which is the CMS index of prices for nursing home inputs 

(e.g., wages, food, and drugs), is used to adjust nursing home payments for Medicare. Some 

states use the CPI for a specific geographic area to adjust rates; for example, Vermont uses 

the CPI for New England. 

39Nursing home payment rates in Iowa were rebased annually under the prior payment 

system, which was in effect until July 1, 2001. 

40Connecticut uses its legislatively determined inflation factor to update rates annually. 

41Seven of the 12 states rely on a variation of the Resource Utilization Group (RUG) Patient 

Classification System—the case-mix classification system used for Medicare—to classify 

nursing home residents, while the remaining 5 states have developed their own 

classification systems. The RUG system classifies nursing home residents into groups 

depending on their therapy, nursing, and special care needs. 

By Adjusting Rates for 

Case-Mix, States Link 

Payment to Resident 

Needs 
Page 17 GAO-04-143 Medicaid Nursing Home Payments 

mix adjusted rates particularly help target payments in states that 

otherwise pay the same, flat rate. Three of the four flat-rate states we 

reviewed make case-mix adjustments to the rates so payments more 

closely approximate the costs likely incurred by individual homes for 

treating residents. 

Recent state fiscal pressures have not resulted in widespread reductions in 

Medicaid payment rates to nursing homes in most states we reviewed, 

although all of these states modified how they pay nursing homes from 

fiscal years 1998 through 2004. While in some cases modifications to 

payment methods have clearly increased or decreased payment rates, in 

other instances the effect of these modifications on payment rates for 

individual homes is mixed. Further, in nearly three-quarters of the states 

we reviewed, nursing home per diem rates grew, on average, by an amount 

that exceeded the SNF market basket index for state fiscal years 2001 

through 2003, similar to the years immediately following the repeal of the 

Boren Amendment. To avoid making significant changes to nursing homes’ 

payment rates, many states reported that they relied on existing resources, 

such as budget stabilization funds and tax increases, to generate additional 

funding. Other factors have also influenced the nature and extent of states’ 

changes to nursing home payment rates. Even with recent temporary 

federal fiscal relief, however, officials in some states suggest that nursing 

home payment reductions are possible in the future. 

Over the past several years, the states we reviewed have faced increasing 

budget pressures, and all reported experiencing fiscal pressure in fiscal 

year 2003. These budget pressures followed consecutive years of 

significant economic growth in many states. For example, through state 

fiscal year 2000, Connecticut experienced 10 years of budget surpluses; 

however, in state fiscal year 2001 the surpluses ended, and the state’s 

deficit was over $800 million. Also, in 2001, Massachusetts began 

experiencing increased fiscal pressures mainly because of decreased tax 

revenues and lower capital gains. 

Irrespective of shifting fiscal pressures experienced by these states, their 

modifications to nursing home payment methods have not resulted in 

widespread payment reductions to nursing homes from fiscal years 1998 

through 2004. During this time, all 19 states we reviewed either modified 

State Fiscal Pressures 

Generally Have Not 

Affected Medicaid 

Payment Rates to 

Nursing Homes, but 

Future Changes 

Remain Uncertain 

State Fiscal Pressure Has 

Not Led to Major Changes 

in Medicaid Nursing Home 

Payment Methods or Rates 
Page 18 GAO-04-143 Medicaid Nursing Home Payments 

components of their payment methods, such as changing cost-center 

ceilings or implementing case-mix systems, or created new payment 

methods, as was the case in Arkansas and Iowa.42 However, the extent to 

which states changed specific features of their payment methods generally 

remained constant during this time, with varying effects on payment rates 

to individual homes within states. (See app. III for a list of selected state 

changes.) 

In addition, despite each of the 19 states experiencing recent fiscal 

pressure, only 4 states—Illinois, Massachusetts, Michigan, and Texas—

explicitly cut the per diem rates paid to all nursing homes at some point 

during state fiscal years 1998 through 2004, and the rate reduction was for 

less than 1 year in 2 of these states. For example, for the 3-month period of 

March through May 2003, Massachusetts reduced payment rates to nursing 

homes by approximately 2.5 percent, but increased payment rates in June 

2003 by about 6.3 percent.43 Similarly, Michigan reduced nursing home 

rates from January through September 2002 by approximately 1 percent.44

With the start of Michigan’s fiscal year 2003 (October 1, 2002), this 

reduction was lifted; however, facing budgetary constraints, the state 

again reduced nursing home payment rates from March 2003 through 

September 2003 by roughly 1.85 percent.45 While reductions in per diem 

rates were temporary in these 2 states, the reduction in per diem rates in 

Illinois and Texas were for longer periods of time. Illinois, for example, 

implemented an across-the-board 5.9 percent cut to existing rates to all 

Medicaid providers, including nursing homes, in July 2002, and froze 

 42Some states we reviewed also noted limited changes made to Medicaid services and 

eligibility, such as Florida’s elimination of denture coverage for all adults in 2002, which 

could affect nursing home residents. 

43The June 2003 increase in per diem rates was due to provider tax revenues. In addition, 

according to a state official, the state has proposed eliminating the March 2003 cut of 2.5 

percent as part of a plan to increase per diem rates by an additional 3.1 percent. If 

approved, the new per diem rates will be retroactive to September 1, 2003, and will be in 

effect for the remainder of fiscal year 2004, which began on July 1, 2003. Increases in per 

diem rates for the first 2 months of state fiscal year 2004—July and August 2003—will be 

spread over the remaining months of the fiscal year. 

44For Michigan nursing homes, this reduction applied to payment for direct resident care, 

indirect care, and administrative costs, but was not applied to payment for capital costs. 

While this reduction was in effect, the state implemented a provider tax on all nursing 

home beds, and revenue from this tax was used to provide an increase to Medicaid per 

diem rates beginning July 1, 2002. 

45The reduction was only applied to payment for homes’ direct resident care, indirect care, 

and administrative costs. 
Page 19 GAO-04-143 Medicaid Nursing Home Payments 

payment rates at this reduced level for fiscal year 2004, which began on 

July 1, 2003. Similarly, in its 2004/2005 biennial budget, which began 

September 1, 2003, Texas reduced payment rates to Medicaid providers, 

with nursing home per diem rates being reduced by 1.75 percent from their 

fiscal year 2003 levels. 

In addition to these four states, Oregon froze Medicaid payment rates to 

nursing homes in fiscal year 2003 at fiscal year 2002 rates and extended 

this freeze at the beginning of fiscal year 2004. Beginning on July 1, 2003, 

Connecticut froze Medicaid payment rates to nursing homes at January 

2003 levels and also reduced the level of payment increases granted to 

other Medicaid long-term care providers.46

The effect of states’ other modifications on payment methods varies. While 

some changes have obvious positive or negative effects on payment rates, 

the effect of other changes on payments to individual nursing homes is 

mixed. For example, New Jersey’s decreased ceiling for administrative and 

indirect care costs—from 105 to 100 percent of the median costs for all 

homes—and Michigan’s elimination of add-on payments for quality 

incentives and direct resident care staff wages likely lowered payment 

rates to some extent for some nursing homes. Conversely, payment to 

some nursing homes in New York and Vermont increased because of 

recently implemented add-on payments for direct resident care staff 

wages. Effects of other changes on nursing home payments, such as 

Colorado’s implementation of a case-mix system in 2000 or the addition of 

two counties to California’s Bay Area peer group in 2002, could either 

increase or decrease payment rates depending on the home. 

Although the effect that changes to payment methods have on rates for 

individual nursing homes may be mixed, average per diem rates in the 

states we reviewed generally have kept pace with increasing nursing home 

costs as measured by the SNF market basket index from state fiscal years 

1998 through 2003. As figure 1 shows, from state fiscal years 2001 through 

2003—a period during which all 19 states we reviewed were experiencing 

increased fiscal pressures—the average annual percentage change in 

states’ average per diem rates in 14 of the 19 states exceeded the SNF 

 46Oregon’s rate freeze will continue, pending CMS approval of a waiver pertaining to the 

state’s new provider tax legislation. Under Connecticut’s rate freeze, nursing homes will 

continue to receive their January 2003 rates through the end of calendar year 2004. 
Page 20 GAO-04-143 Medicaid Nursing Home Payments 

market basket index.47 This trend is similar to what occurred to rates 

during the years immediately following the repeal of the Boren 

Amendment—1998 through 2000—when states’ fiscal conditions were 

generally much more positive. In that earlier period, the average annual 

percentage change in states’ average per diem rates met or exceeded the 

SNF market basket index in 14 of these states, although the states that fell 

below the SNF market basket index differed somewhat between the two 

periods.48

 47The SNF market basket index measures changes in the costs of the resources nursing 

homes use, such as wages for staff or prices of supplies and equipment. It does not reflect 

necessary changes in the quantities of resources nursing homes must use, such as 

increased staff time when residents’ needs become more complex over time. However, 

changes in residents’ needs from year to year, on average, are modest. The SNF market 

basket index overstates the costs that Medicaid per diem nursing home rates are intended 

to reimburse since it includes prescription drug costs, which Medicaid programs typically 

pay separately. The index may not reflect certain cost changes in individual states. For 

example, in recent years, significant increases in malpractice insurance costs, which likely 

exceed the national average cost increase reflected in the index, have been reported in 

several states. Also, some states have instituted or increased provider taxes nursing homes 

must pay—a cost change not immediately reflected in the index. Four states we reviewed 

—Arkansas, Massachusetts, Michigan, and New York—implemented such a tax during the 

time period reflected in figure 1. For example, New York imposed a provider tax of 6 

percent of nursing homes’ adjusted gross revenues in state fiscal year 2003; as a result, the 

SNF market basket index understates cost increases experienced by the state’s nursing 

homes during the time period of our analysis by 1.6 percentage points. Based on 

discussions with payment experts, we believe that the SNF market basket index is the best 

proxy measurement available to determine how Medicaid nursing home per diem rates 

have kept pace with nursing homes’ changing costs. In addition, states capture changes in 

costs not fully reflected in the SNF market basket index when they rebase rates, which 17 

of the states we reviewed do regularly. 

48The average annual percentage change in states’ average per diem rates fell below the 

SNF market basket index from 1998 through 2000 in Arkansas and South Dakota; from 2001 

through 2003 in Connecticut and Massachusetts; and for both periods in California, Illinois, 

and New York. 
Page 21 GAO-04-143 Medicaid Nursing Home Payments 

Figure 1: Average Annual Percentage Change in Average Per Diem Rates, by State, Compared to the SNF Market Basket 

Index, State Fiscal Years 2001-2003 

Notes: Each bar represents the compounded average of the annual percentage change in statewide 

average per diem rates from 2001 through 2003, and is based on GAO analyses of Medicaid nursing 

home per diem rates from 2000 through 2003. For each of these fiscal years, states provided the 

most readily available per diem rates, which were most commonly those rates in effect at the 

beginning of the fiscal year. All states provided homes’ average rates weighted by resident days 

except Arkansas and Pennsylvania, which provided projected rates for state fiscal year 2003. Per 

diem rates were unavailable for 2003 in Michigan. 

From state fiscal years 2001 through 2003, the average annual change in 

per diem rates fell below the SNF market basket index in five states—

California, Connecticut, Illinois, Massachusetts, and New York. The 

factors that contributed to per diem rates falling below this index varied 

among these states.49 For example, Illinois’ rate reduction in fiscal year 

2003 of almost 6 percent contributed to the average rate change falling 

below the SNF market basket index. In addition, the lack of regular 

rebasing likely contributed to lower per diem rates in Illinois and New 

 49For other reasons, some states’ annual average percentage change in the per diem rates 

fluctuated above or below the SNF market basket index. For example, Arkansas 

implemented a new nursing home payment system in January 2001, and as a result rate 

increases were significantly higher than the SNF market basket index. 

Source: State Medicaid programs.

AL AR CA CO CT FL IL IA MA MI NJ NY ND OR PA RI SD TX VT

State

Average annual percentage change

Average percentage change in SNF market basket index

0

2

4

6

8

10

12

14

16
Page 22 GAO-04-143 Medicaid Nursing Home Payments 

York. Illinois rebased rates only once from fiscal years 1994 through 2001, 

and as previously noted, New York has not fully rebased rates since 1986. 

In addition, industry officials in some states told us that the inflation factor 

used to update rates in non-rebase years is insufficient to meet nursing 

homes’ changing costs. For example, industry officials in New York said 

that the inflation factor the state uses to update homes’ rates annually, the 

CPI, does not reflect increasing health care costs. In addition, 

Connecticut—which rebases rates at least once every 2 to 4 years—uses a 

legislatively set inflation factor to increase rates in non-rebase years, 

which for the past several years has been limited to approximately 2 

percent. Industry and Medicaid officials contend that this legislated 

amount, which has consistently fallen below the SNF market basket index, 

does not correspond with increases in actual nursing home costs. 

To help balance their budgets, states we reviewed have relied on 

alternative funding sources—including budget stabilization and tobacco 

settlement funds— and have enhanced revenue by increasing taxes (see 

table 3).50

 50Some states have also enhanced their revenue through the use of upper payment limit 

(UPL) schemes in nursing homes. We have noted problems with some state UPL programs 

in the past; however, independently reviewing the validity of these programs was beyond 

the scope of this report. See U.S. General Accounting Office, Medicaid: HCFA Reversed Its 

Position and Approved Additional State Financing Schemes, GAO-02-147 (Washington, 

D.C.: Oct. 30, 2001), and Medicaid: State Financing Schemes Again Drive Up Federal 

Payments, GAO/T-HEHS-00-193 (Washington, D.C.: Sept. 6, 2000). Also see related GAO 

products at the end of this report. 

States Averted More 

Significant Payment and 

Programmatic Changes to 

Nursing Homes through 

Several Means 
Page 23 GAO-04-143 Medicaid Nursing Home Payments 

Table 3: Examples of Funding Sources States Reported Using to Respond to Fiscal 

Pressures, 1998-2003 

State 

Tobacco 

settlement 

fund

Budget 

stabilization 

fund 

Cigarette tax 

increase

Medicaid 

trust fund

Alabama 

Arkansas 

California X 

Colorado X 

Connecticut X 

Florida X 

Illinois X X

Iowa X X 

Massachusetts X X 

Michigan X X X X

New Jersey X X X 

New York X X X

North Dakota X 

Oregon X X

Pennsylvania X X 

Rhode Island X 

South Dakota X

Texas 

Vermont X X

Total 12 9 6 2

Source: State Medicaid programs. 

Sixteen of the 19 states we reviewed reported using alternative funding 

sources, such as tobacco settlement, budget stabilization, cigarette tax 

increases, and Medicaid trust funds to deal with their states’ budgetary 

pressures. Most commonly, states relied on tobacco settlement funds to 

ease fiscal pressures. While many of the states we reviewed have 

employed alternative funding sources or cigarette tax increases, not all the 

states relied on these funds to cope with their budget situations. For 
Page 24 GAO-04-143 Medicaid Nursing Home Payments 

instance, all 19 states received tobacco settlement funds, yet only 12 used 

these funds from 1998 through 2003 to respond to fiscal pressures.51

To help fund Medicaid nursing home payments in particular, several states 

rely on nursing home provider taxes, and in light of recent fiscal pressures, 

an increasing number of states have recently adopted or proposed these 

taxes in an effort to fund nursing home payments or to avert service 

reductions.52 Of the 19 states we reviewed, 8 currently have provider taxes 

for nursing homes, with at least 4 of these states implementing the tax 

since 2001, when fiscal pressures began increasing in many states. In 

addition, 5 of the states reviewed currently have pending for CMS’s 

approval a proposal to adopt a provider tax on nursing homes (see table 

4). Of all types of providers, nursing homes were most commonly subject 

to new provider taxes in state fiscal years 2003 and 2004, according to a 

recent survey of all 50 states and the District of Columbia.53

 51Tobacco settlement funds are received by all 50 states, the District of Columbia, and the 5 

U.S. territories. Annually, tobacco companies pay 46 states for past health care costs 

related to tobacco use as required by the Master Settlement Agreement of 1998. The 

remaining 4 states—Florida, Minnesota, Mississippi, and Texas—receive payments from 

tobacco companies per the requirements of individual settlement agreements. See U.S. 

General Accounting Office, States’ Allocations of Fiscal Years 2002 and 2003 Master 

Settlement Agreement Payments, GAO-03-407 (Washington, D.C.: Feb. 28, 2003). 

52As a general rule, states may impose a health-care related nursing home provider tax for 

up to 6 percent of nursing homes’ gross revenues if the tax is broad-based and uniformly 

applied to all health care providers in a provider class—for example, to all nonpublic 

nursing homes as either a dollar amount per bed or a percent of individual homes’ 

revenues. See 42 U.S.C. § 1396b (w)(3)(B) and (C); 42 C.F.R. § 433.68 (f). In a state with a 

nursing home provider tax, a nursing home may claim, as an allowable Medicaid cost, the 

portion of the provider tax paid that relates to providing services to Medicaid beneficiaries. 

Upon paying the home’s claim for reimbursement, the state subsequently receives federal 

matching funds for these paid claims, including the provider tax. 

53See Vernon Smith, et al., States Respond to Fiscal Pressure: State Medicaid Spending 

Growth and Cost Containment in Fiscal Years 2003 and 2004, Results from a 50-State 

Survey (Washington, D.C.: Kaiser Commission on Medicaid and the Uninsured, September 

2003). 
Page 25 GAO-04-143 Medicaid Nursing Home Payments 

Table 4: Existing or Pending Nursing Home Provider Taxes in 13 of 19 Reviewed 

States, September 2003 

Status State 

Existing Alabama 

 Arkansas 

 Illinois 

 Massachusetts 

 Michigan 

 New York 

 Rhode Island 

 Vermont 

Pending Colorado 

 Iowa 

 New Jersey 

 Oregon 

 Pennsylvania 

Source: State Medicaid programs. 

Officials in some states told us that they have avoided making substantial 

reductions to nursing home payment rates because of other factors. For 

example, state legislative or regulatory action is typically required to 

change nursing home payment methods, and garnering sufficient support 

for such changes—especially for rate reductions—is often difficult. In 

addition, the nursing home industry has actively worked to avoid 

decreases in payment rates in several states. For example, industry 

officials in Alabama, Iowa, and Texas cited campaigns that they 

considered successful in various ways, such as preventing rate reductions 

or encouraging rate increases. Specifically, nursing home industry officials 

in Iowa said that two proposed nursing home rate cuts were defeated in 

part because of their opposition. Also, industry officials in Texas said that 

through their efforts, nursing homes were able to obtain rate increases for 

fiscal year 2002. 
Page 26 GAO-04-143 Medicaid Nursing Home Payments 

Although the extent of states’ continued fiscal pressure is unknown, states 

expect their poor fiscal situations to continue through fiscal year 2004. 

According to an April 2003 NCSL study, 28 states and the District of 

Columbia expected budget shortfalls totaling over $53 billion in fiscal year 

2004.54 These budget gaps may be difficult to fill as many states reported 

that they have depleted or nearly depleted their alternative funding 

sources. Over half of the states we reviewed that used budget stabilization 

funds, and 3 of the 12 states that used tobacco settlement funds, reported 

having depleted or nearly depleted these sources. 

Some states we reviewed reported their plans to confront continuing 

budget pressures in fiscal year 2004. As previously noted, at least six of 

these states reduced or froze their nursing home payment rates at some 

point during the past 2 fiscal years. In addition, these and other states have 

recently undertaken or are currently considering actions to reduce future 

nursing home payment rates. For example, California rebased nursing 

home rates for the 2004 rate year, which began on August 1, 2003, but has 

already frozen 2005 payment rates at current levels. Similarly, in August 

2003, Connecticut froze per diem rates at their January 2003 levels through 

December 2004. Even with recent temporary federal fiscal relief, officials 

in some states suggest that nursing home payment reductions are possible 

in the future. For example, a Michigan state official indicated that 

reductions in 2004 per diem rates are probable because the legislative 

appropriation is likely insufficient to rebase rates. 

We provided a draft of this report to the Medicaid Director in each of the 

19 study states for technical review. All states generally agreed with our 

characterization of their respective nursing home payment methods and, 

when necessary, provided clarifying or technical comments, which we 

incorporated as appropriate. In addition, we obtained oral comments on a 

draft of this report from representatives of two nursing home associations, 

the American Health Care Association (AHCA) and the American 

Association of Homes and Services for the Aging (AAHSA). We have 

modified the report, as appropriate, in response to their technical 

comments. 

 54National Conference of State Legislatures (NCSL), State Budget Update: April 2003 

(Washington, D.C.: April 2003). 

Future Options for Dealing 

with Fiscal Pressures May 

Be More Uncertain 

External Comments 
Page 27 GAO-04-143 Medicaid Nursing Home Payments 

As agreed with your offices, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days after its 

issue date. At that time, we will send copies to the Administrator of CMS 

and appropriate congressional committees. We will also make copies 

available to others upon request. In addition, the report will be available at 

no charge on the GAO Web site at http://www.gao.gov. 

If you or your staffs have any questions, please contact me at (202) 512-

7118. An additional contact and other staff members who made 

contributions to this report are listed in appendix IV. 

Kathryn G. Allen 

Director, Health Care—Medicaid 

 and Private Health Insurance Issues 
Appendix I: Scope and Methodology 

Page 28 GAO-04-143 Medicaid Nursing Home Payments 

To examine Medicaid nursing home payment methods and rates, we 

selected 20 states for our review. The 20 states included the following: 

• 10 states (1 from each of the 10 Centers for Medicare & Medicaid Services 

(CMS) regions) with the largest decline or smallest growth in revenue 

from 2000 through 2002 within their regions, based on data in the 

November 2002 fiscal survey of states conducted by the National 

Association of State Budget Officers (NASBO) and the National Governors 

Association (NGA); 

• 5 states with the largest population based on 2000 Census data; and 

• 5 states with the highest number of Medicaid nursing home residents per 

capita, as indicated by the most recent data in CMS’s Online Survey 

Certification and Reporting (OSCAR) database (see table 5). 

Nationwide, these 20 states represented approximately 62 percent of 

Medicaid nursing home expenditures in fiscal year 2001 and 59 percent of 

Medicaid nursing home residents in fiscal year 2000, according to the most 

recently available CMS data. 

Table 5: Study States Categorized by Selection Factors 

States selected for sample 

Largest decline or smallest growth in revenue 

from 2000 through 2002 (CMS region) 

Largest 

population 

Highest number 

of Medicaid 

nursing home 

residents per 

capita 

Alabama (IV) 

Arizona (IX) 

Arkansas (VI) 

Colorado (VIII) 

Iowa (VII) 

Michigan (V) 

New Jersey (II) 

Oregon (X) 

Pennsylvania (III) 

Vermont (I) 

California 

Florida 

Illinois 

New York 

Texas 

Connecticut 

Massachusetts 

Rhode Island 

North Dakota 

South Dakota 

Source: National Governors Association and National Association of State Budget Officers, The Fiscal Survey of States (Washington, 

D.C.: November 2002), http://www.nasbo.org (downloaded Dec. 6, 2002); The U.S. Census Bureau; and CMS’s OSCAR. 

In each of the 20 states, we interviewed officials from the Medicaid and 

budget offices. From these officials, we obtained information about 

nursing home payment methods (including changes) for state fiscal years 

1998 through 2004 and per diem rates for state fiscal years 1998 through 

2003. In addition, to gain a broader understanding of Medicaid nursing 

Appendix I: Scope and Methodology 
Appendix I: Scope and Methodology 

Page 29 GAO-04-143 Medicaid Nursing Home Payments 

home payments, we interviewed representatives from the offices of the 

American Health Care Association (AHCA) and/or the American 

Association of Homes and Services for the Aging (AAHSA) in each of the 

20 states. We also interviewed national representatives of AHCA and 

AAHSA and consultants and experts in the field of Medicaid nursing home 

payment. Because Arizona’s Medicaid program is predominantly a 

managed care system, the state determines payment rates for only 5 

percent of the nursing home population. Therefore, this report excludes 

Arizona and presents our findings from analyses of the other 19 states. 

To examine the extent to which states base nursing home payment rates 

on homes’ costs, we reviewed documentation, including some state laws 

and regulations.1

 Relying on these documents as well as our interviews 

with state officials, we also identified key features of payment methods, 

such as whether rates are home-specific and how frequently states update 

or rebase the rates they pay nursing homes. In addition, we summarized 

the extent to which states’ payment methods incorporate features such as 

peer grouping, cost-center ceilings, and case-mix adjustment systems. 

To determine how state fiscal pressures have affected Medicaid programs 

with regard to nursing home payment rates and methods, we collected per 

diem rates from state fiscal years 1998 through 2003, fiscal year 2003 being 

the most current year for which per diem rates were available, and 

information about changes made to nursing home payment methods from 

state fiscal years 1998 through 2004. We used the per diem rate data to 

compare the average annual percentage change in states’ average nursing 

home payment rates from state fiscal years 1998 through 2003 to the 

corresponding years’ change in the skilled nursing facility (SNF) market 

basket index.2

 The SNF market basket index, which is developed and 

updated annually by Global Insights, Inc., is used by CMS to reflect 

changes in the prices of goods and services included in the Medicare SNF 

 1

We did not perform a comprehensive review of state laws and regulations related to 

nursing home payment methods. 

2

To conduct this analysis, we obtained the most readily available data from the states. 

Depending on the state, the data provided were typically for the respective state’s fiscal 

year, although some states provided data by calendar year. We converted calendar year 

rates provided by Iowa to fiscal year rates for the last 6 months of state fiscal year 1998 and 

for state fiscal years 1999 through 2001. For state fiscal years 2002 and 2003, Iowa provided 

per diem rates and resident days for each nursing home, which we used to calculate the 

statewide average per diem rate. 
Appendix I: Scope and Methodology 

Page 30 GAO-04-143 Medicaid Nursing Home Payments 

prospective payment system.3 States typically provided us with their 

average Medicaid nursing home per diem rates weighted by resident days; 

however, in a few instances we had to use a state’s home-specific rates 

and resident days to calculate the weighted average per diem rate. For 

2003, an average per diem rate was not available in Michigan, and 

projected per diem rates were provided by Arkansas and Pennsylvania. 

We encountered limitations with data provided by two other states. For 

example, North Dakota law generally prohibits nursing homes from 

charging private-pay residents more than the Medicaid rate;4

 however, 

rates provided to us by the state were based on total resident days, which 

include payments for 3 to 5 percent of residents whose care is paid at 

typically higher Medicare rates. Therefore, the rates provided to us may be 

slightly higher than the average Medicaid rate. Conversely, the rates 

provided by Pennsylvania may be slightly lower than the actual average 

nursing home Medicaid rate because they include nursing homes 

residents’ temporary hospital stays, which account for approximately 1 

percent of total resident days and for which homes only receive one-third 

of the per diem rate. Finally, we reviewed information compiled by 

NASBO, NGA, and NCSL related to states’ fiscal outlook and possible 

future reductions in the Medicaid program, including reductions affecting 

nursing homes. 

 3

Global Insights, Inc., is an economic and financial information company. 

4

N.D. Cent. Code § 50-24.4-19.1 (1999). 
Appendix II: Summary of Certain Payment 

Characteristics Used in Selected States 

Page 31 GAO-04-143 Medicaid Nursing Home Payments 

States use many of the same features within their payment methods. We 

describe below certain features of the payment methods used in the states 

we reviewed: peer groups, cost-center ceilings, efficiency incentives, casemix systems, and occupancy standards. 

Ten states we reviewed classify homes into peer groups, or categories 

based on characteristics such as size or location, and typically set separate 

cost-center ceilings for each peer group.1

 The states we reviewed most 

commonly categorize nursing homes by geographic region or home type.2

However, how states use peer groups varies (see table 6). For example, 

some states, such as New Jersey, use peer groups within all cost centers, 

while other states, such as Alabama, only group homes in one cost center. 

Further, states differ in the number and type of peer grouping categories 

they use. For example, Illinois’s peer grouping uses seven geographic 

regions in all cost centers; Connecticut bases its peer grouping on two 

geographic regions and two home types in the direct resident care cost 

center; and Florida’s peer grouping is based on three geographic regions 

and two home sizes in both the direct resident care and administrative 

cost centers. 

 1

The nine states reviewed that did not classify homes into peer groups were Arkansas, 

Colorado, Massachusetts, North Dakota, Oregon, Rhode Island, South Dakota, Texas, and 

Vermont. 

2

Home type includes categories such as home ownership (e.g., proprietary, nonprofit, or 

governmental); resident care need (e.g., skilled nursing homes, low-intensity homes for 

those with mental retardation, or chronic convalescent nursing homes); and whether the 

home is hospital-based or freestanding. 

Appendix II: Summary of Certain Payment 

Characteristics Used in Selected States 

Peer Groups 
Appendix II: Summary of Certain Payment 

Characteristics Used in Selected States 

Page 32 GAO-04-143 Medicaid Nursing Home Payments 

Table 6: Peer Grouping Techniques Used in Reviewed States, as of June 2003 

State Peer groups 

Alabama Two home sizes in the administrative cost center 

California Eight home types based on resident care need in all cost centers: five of 

the eight home types further grouped by three geographic regions and/or 

two home sizes; two of the eight home types further grouped by each 

resident’s ventilator need; and one of the eight home types does not use 

additional peer groups 

Connecticut Two geographic regions and two home types based on resident care 

need in the direct resident care cost center 

Florida Three geographic regions and two home sizes in the direct resident care 

and administrative cost centers 

Illinois Seven geographic regions in all cost centers 

Iowa Two home types based on whether the home is Medicare-certified and 

hospital-based or freestanding 

Michigan Two home types based on ownership or whether the home is hospitalbased or freestanding 

New Jersey Three home types based on ownership or resident care need in all cost 

centers 

New York Two home sizes, two levels of care, and whether home is hospital-based 

or freestanding in the indirect care cost center; 16 geographic regions for 

wage adjustment in the indirect care and direct resident care cost 

centers; two home types based on ownership and further grouped by 

lease type and date or financing method in the capital cost center 

Pennsylvania Four geographic regions and three home sizes in the direct resident 

care, indirect care, and administrative cost centers 

Source: State Medicaid programs. 
Appendix II: Summary of Certain Payment 

Characteristics Used in Selected States 

Page 33 GAO-04-143 Medicaid Nursing Home Payments 

To limit the maximum amount states pay for costs within a given cost 

center, ceilings are typically set at a percentage of median costs, or a 

certain percentile of costs, for all nursing homes in a state or a subset of 

nursing homes with similar characteristics in states that pay home-specific 

rates.3

 Homes in these states generally receive rates based on the lower of 

their actual costs or the ceiling.4

 While most states we reviewed divide 

their operating costs into three centers—direct resident care, indirect 

care, and administration—plus a center for capital costs—the number of 

cost centers in the states we reviewed ranges from two in Oregon to seven 

in Rhode Island. In addition, states differ in how they categorize costs. For 

example, 8 states combine indirect care and administrative costs into a 

single cost center. Similarly, states may differ in how they categorize 

certain costs. For instance, Pennsylvania’s direct resident care center 

includes medical supplies, which are considered indirect costs in 

Connecticut and Rhode Island. Table 7 describes ceilings for operating 

costs in the 15 states that pay individual/home-specific rates, and table 8 

describes how the remaining 4 states—California, Massachusetts, Oregon, 

and Texas—develop their flat rates, which serve as a type of ceiling, to pay 

for all nursing homes in the state. 

 3

In addition to imposing ceilings, many states use other mechanisms to limit the costs they 

will recognize when determining homes’ rates. 

4

In states that use efficiency incentives, homes are also eligible to receive an additional 

payment included in their per diem rate. 

Cost-Center Ceilings 
Appendix II: Summary of Certain Payment 

Characteristics Used in Selected States 

Page 34 GAO-04-143 Medicaid Nursing Home Payments 

Table 7: Direct Resident Care, Indirect Care, and Administrative Cost-Center Ceilings in Reviewed States with Individual 

Home Rates, as of June 2003 

Cost-center ceilings 

State Direct resident care Indirect care Administrative 

Alabama 110 percent of median costs for all 

homesa

110 percent of median costs for all 

homes 

105 percent of median costs for all 

homes within each peer group 

Arkansas 105 percent of 90th percentile for all 

homesb

Flat rate set at 110 percent of median costs for all homesc

Colorado 125 percent of average costs weighted 

by total resident days for all homes 

within each peer group 

120 percent of average costs 

weighted by total resident days for all 

homes within each peer group for 

room and board costs; 125 percent of 

weighted average costs for all homes 

within each peer group for other 

indirect costs 

120 percent of average costs 

weighted by total resident days for all 

homes within each peer groupd

Connecticut 135 percent of median costs for all 

homes within each peer group 

115 percent of median costs for all 

homes 

100 percent of median costs for all 

homes 

Florida 1.75 standard deviations above median 

costs for all homes within each peer 

group 

1.75 standard deviations above 

median costs for all homes within 

each peer groupe

One standard deviation above median 

costs for all homes within each peer 

groupe

Illinois None 75th percentile of costs for all homes within each peer group 

Iowa 120 percent of median costs for all 

homesf

110 percent of median costs for all homes 

Michigan 80th percentile of costs for all homes 

within each peer group 

80th percentile of costs for all homes within each peer groupg

New Jersey 120 percent of median costs for all 

homes within each peer group 

110 percent through 150 percent of 

median costs, depending on specific 

type of costs, for all homes within 

each peer group 

100 percent of median costs for all 

homes within each peer group 

New Yorkh Ceiling based on updated 1983 prices 

for each level of resident care need 

105 percent of average costs for all homes within each peer group 

North Dakota 99th percentile of costs for all homesi, j 85th percentile of costs for all homesi 75th percentile of costs for all homes 

Pennsylvania 117 percent of median costs for all 

homes within each peer group 

112 percent of median costs for all 

homes within each peer group 

104 percent of median costs for all 

homes within each peer groupk

Rhode Island 80th percentile of costs for all homes 80th percentile of costs for all homes 80th percentile of costs for all homes 

South Dakotal 115 percent of median costsm for all 

homes, and 80 percent of costs that fall 

from 115 percent through 125 percent 

of the median 

105 percent of median costsm for all 

homes, and 80 percent of costs that 

fall from 105 percent through 110 

percent of the median 

105 percent of median costsn for all 

homes, and 80 percent of costs that 

fall from 105 percent through 110 

percent of the median 

Vermont 115 percent of median costs for all 

homes 

105 percent of median costs for all 

homes 

Median costs for all homes except 

special hospital-based homes, which 

are capped at 137 percent of the 

median for all homeso

Source: State Medicaid programs. 
Appendix II: Summary of Certain Payment 

Characteristics Used in Selected States 

Page 35 GAO-04-143 Medicaid Nursing Home Payments 

Note: While the table identifies standard names for cost centers, states use a variety of names, such 

as nursing instead of direct resident care or operations instead of administration. 

a

In Alabama, nursing homes receive the lower of 110 percent of their direct resident care costs or 110 

percent of the direct resident care ceiling. 

b

Through June 30, 2004, Arkansas imposes a floor of 90 percent of the median costs for all homes in 

the direct resident care center. Homes with costs below the floor retain the difference between their 

costs and the floor. 

c

According to an Arkansas official, the state considers its rates to be home-specific since the majority 

of the rate is paid on a home-specific basis through the direct resident care cost center. 

d

In Colorado, nursing homes are limited to a maximum increase in payments for administrative costs 

of 6 percent annually. 

e

In Florida, two additional ceilings may be applied to the indirect care and administrative cost centers. 

The nursing home’s payment is limited to the lowest of all ceilings. 

f

In Iowa, the direct resident care ceiling for urban nursing homes is adjusted by a geographic wage 

index, which generally increases the ceiling for these homes by approximately 10 percent. 

g

Indirect care/administrative payment to each Michigan nursing home is limited to a percentage of the 

amount reimbursed in the direct resident care cost center. The exact percentage for each home 

depends on its size, and as of June 2003, ranged from 32.6 percent for homes with at least 150 beds 

to about 33.6 percent for homes with 50 or fewer beds. 

h

In the direct resident care, indirect care, and administrative cost centers, New York imposes a floor of 

92.5 percent of the average costs for all nursing homes within each peer group. Homes with costs 

below the floor retain the difference between their costs and the floor. 

i

In North Dakota, a 3 percent operating margin is added to the payment for all nursing homes in the 

direct resident care and indirect care cost centers. 

j

North Dakota’s direct resident care ceiling was changed to $85 at the start of state fiscal year 2004. 

k

In Pennsylvania, payment for nursing homes’ administrative costs is limited to 12 percent of total 

payment for direct resident care, indirect care, and administrative costs. 

l

South Dakota nursing homes are limited to no more than an 8 percent annual increase in their overall 

payment rates. 

m

South Dakota determines median costs after excluding nursing homes in which residents have low 

care needs, as these homes generally have lower direct resident care and indirect care costs. 

n

When calculating the administrative cost center median, South Dakota excludes the costs of nursing 

homes that are part of large national chains, because according to state Medicaid officials, these 

homes generally operate with administrative costs that are significantly higher than independent 

homes. 

o

Vermont’s special hospital-based homes must meet the following criteria as of June 16, 2001. They 

must be (1) within a hospital building, (2) part of the same corporation that governs the hospital, and 

(3) file Medicare cost reports jointly with the hospital. 
Appendix II: Summary of Certain Payment 

Characteristics Used in Selected States 

Page 36 GAO-04-143 Medicaid Nursing Home Payments 

Table 8: Direct Resident Care, Indirect Care, and Administrative Cost-Center 

Ceilings in Reviewed States with Flat Payment Rates, as of June 2003 

 Cost-center ceilings 

State Direct resident care Indirect care Administrative 

California Flat rate set at the 

median costs for all 

homes within certain 

peer groups 

Flat rate set at the median costs for all homes 

within certain peer groups 

Massachusetts Flat rate set at median 

costs for all homesa

Flat rate determined by adding 85 percent of 

median for administrative costs to median of 

indirect costs for all homes 

Oregon Flat rate set at 

approximately 90 

percent of statewide 

average costs for all 

homesb

Flat rate set at approximately 90 percent of 

statewide average costs for all homes 

Texas Flat rate set at 107 

percent of weighted 

average for all homes’ 

updated 1998 costsc

Flat rate set at 107 

percent of weighted 

average costs for all 

homesc

Flat rate set at 107 

percent of median 

costs for all homes 

Source: State Medicaid programs. 

Note: While the table identifies standard names for cost centers, states use a variety of names, such 

as nursing instead of direct resident care or operations instead of administration. 

a

In Massachusetts, rates paid to all nursing homes are also adjusted based on resident care need. 

b

In Oregon, nursing homes with residents who require complex care can receive additional payments. 

c

In Texas, rates paid to all nursing homes are also adjusted based on resident care need. 
Appendix II: Summary of Certain Payment 

Characteristics Used in Selected States 

Page 37 GAO-04-143 Medicaid Nursing Home Payments 

Seven states we reviewed include efficiency incentives in their payment 

methods, which typically allow nursing homes with costs below a 

predetermined amount (generally the cost-center ceiling or the median 

costs) in one or more cost centers to have a portion of the difference 

incorporated into their per diem rates (see table 9).5

 For example, 

Connecticut uses efficiency incentives in both its indirect care and 

administrative cost centers. In the indirect care center, nursing homes 

with costs below the median have 25 percent of the difference between 

their costs and the median costs added to their per diem rates. The 

following hypothetical example demonstrates how this efficiency 

incentive generally would work. If a home’s costs were $20 per day in the 

indirect care cost center, and the median indirect care costs for all homes 

were $24 per day, then the home has costs that are $4 below the median 

and would have 25 percent of the difference between its costs and the 

median, or $1, added to its rate. Each of the seven states applies efficiency 

incentives differently. 

 5

The 12 states reviewed that did not use efficiency incentives in their payment methods are 

Arkansas, California, Florida, Massachusetts, Michigan, New Jersey, New York, Oregon, 

Rhode Island, South Dakota, Texas, and Vermont. 

Efficiency Incentives 
Appendix II: Summary of Certain Payment 

Characteristics Used in Selected States 

Page 38 GAO-04-143 Medicaid Nursing Home Payments 

Table 9: Efficiency Incentives Used in Reviewed States, as of June 2003 

State Direct resident care cost center Indirect care cost center Administrative cost center 

Alabama If a home’s costs are below the 

ceiling, it receives 50 percent of the 

difference between its costs and the 

ceiling 

Colorado If a home’s costs are below the 

ceiling, it receives 12.5 percent of 

the difference between its costs and 

the ceiling 

Connecticut If a home’s costs are below the 

median, it receives 25 percent of the 

difference between its costs and 

median costs 

If a home’s costs are below the 

median, it receives 25 percent of the 

difference between its costs and 

median costs 

Illinois If a home’s costs are below the 

ceiling, it receives 50 percent of the 

difference between the 35th and 75th 

percentiles of its peer group’s costs 

Iowa If a home’s costs are below 95 

percent of the median, it receives 100 

percent of the difference between its 

costs and the median, up to 10 

percent of the median 

If a home’s costs are below 96 percent of the median, it receives 65 percent 

of the difference between its costs and the median, up to 8 percent of the 

mediana

North Dakota If a home’s costs are below the 

ceiling, it receives 70 percent of the 

difference between its costs and the 

ceiling, up to $2.60 per resident day 

Pennsylvania If a home’s costs are below the 

ceiling, it receives 3 percent of the 

difference between its costs and the 

ceiling, and up to 30 percent of the 

remaining difference up to ceiling 

If a home’s costs are below the 

ceiling, it receives 3 percent of the 

difference between its costs and the 

ceiling, and up to 30 percent of the 

remaining difference up to ceiling 

Source: State Medicaid programs. 

a

Iowa combines nursing homes’ indirect care and administrative costs into a single cost center. 
Appendix II: Summary of Certain Payment 

Characteristics Used in Selected States 

Page 39 GAO-04-143 Medicaid Nursing Home Payments 

Case-mix systems categorize residents into groups based on the level of 

care they need and adjust payment rates to homes accordingly. Twelve of 

the 19 states we reviewed use case-mix systems, although the type of 

system and the number of case-mix categories vary widely.6

 While 5 states 

have designed their own systems to measure case-mix, the remaining 7 

states rely on some variation of the Resource Utilization Group (RUG) 

Patient Classification System, which is also used to determine the acuity 

level of nursing home residents in the Medicare program.7

 The 7 states that 

use various versions of the RUG Patient Classification System place 

residents in 16 to 44 resident classification groups. In contrast, Oregon 

places residents into one of two groups, basic or complex care.8

 The casemix classification system used by each state is shown in table 10. 

 6

The seven states reviewed that did not use case-mix systems to categorize residents were 

Alabama, Arkansas, California, Connecticut, Florida, Michigan, and Rhode Island. 

7

CMS uses the RUG-III 44-group model to determine the case-mix of Medicare-covered 

nursing home residents. 

8

In Oregon, approximately 95 percent of nursing home residents are grouped in the basic 

care category. 

Case-Mix Systems 
Appendix II: Summary of Certain Payment 

Characteristics Used in Selected States 

Page 40 GAO-04-143 Medicaid Nursing Home Payments 

Table 10: Case-Mix Classification Systems Used in Reviewed States, as of 

June 2003 

State Case-mix classification system 

Colorado RUG-III, 34 groups 

Illinois State-specific system, 36 groupsa, b

Iowa RUG-III, 34 groups 

Massachusetts State-specific system,c 10 groups 

New Jersey State-specific system,d 7 groups 

New York RUG-II, 16 groups 

North Dakota RUG-III, 34 groups 

Oregon State-specific system,e 2 groups 

Pennsylvania RUG-III, 44 groups 

South Dakota RUG-III, 34 groups 

Texas State-specific system,f 11 groups 

Vermont RUG-III, 44 groups 

Source: State Medicaid programs. 

a

Illinois’s case-mix system is based on its Inspection of Care (IOC) report. The IOC measures 

resident needs and services using 36 direct care pricing criteria to determine an average case-mix 

score for each nursing home. In 1994, the state stopped routinely administering comprehensive IOC 

reports. From 1994 through 2002, a nursing home could request an update to its IOC report if its 

resident turnover was at least 25 percent. However, in October 2002 the state stopped using the 

entire IOC system altogether and no longer prepares IOC reports. The last report for each nursing 

home is used to adjust payment rates for case-mix. 

b

Illinois implemented a new case-mix system based on the Minimum Data Set, also used by CMS, in 

state fiscal year 2004, which began on July 1, 2003. A 2-year hold harmless provision protects 

nursing homes from experiencing decreased rates as a result of this new system. However, since per 

diem rates were frozen at the beginning of state fiscal year 2004, the new case-mix system did not 

immediately increase payment rates to nursing homes. 

c

Massachusetts’s case-mix system is based on its Management Minutes Questionnaire. Residents 

are grouped into 1 of 10 categories based on the level of care they require in activities of daily living 

and skilled nursing. On the basis of this classification, nursing homes are paid one of six different 

rates. 

d

New Jersey’s case-mix system provides payment for additional hours of nursing for residents 

needing seven different services. 

e

Oregon’s case-mix system provides an additional payment to nursing homes’ basic rate for residents 

with complex care needs, for example, residents who need intravenous injections or who have open 

wounds requiring aggressive treatment. 

f

Texas’s case-mix system is the Texas Index for Level of Effort (TILE). TILE is a state-designed, 11-

group system modeled on a version of the RUG Patient Classification System. Nursing home 

residents are placed in 1 of the 11 groups depending on their need for various resources. 
Appendix II: Summary of Certain Payment 

Characteristics Used in Selected States 

Page 41 GAO-04-143 Medicaid Nursing Home Payments 

By applying an occupancy standard, states reduce the per diem rates paid 

to nursing homes with occupancy below the state-established minimum 

levels. Of the 19 states reviewed, 17 use occupancy standards, which vary 

from 75 percent in Arkansas to 98 percent in Rhode Island, to determine 

nursing home payment rates.9

 The following hypothetical example 

demonstrates how a state may apply an occupancy standard. A state 

applies an occupancy standard of 85 percent in the indirect care cost 

center, but a nursing home has a 75 percent occupancy level (along with 

annual costs of $200,000 in the indirect care cost center and 36 beds). 

Using the home’s actual occupancy, its payment rate for the indirect care 

cost center would be $20.29 (or $200,000/[.75 x 36 beds x 365 days]), 

whereas adjusting the home’s payment in the indirect care cost center for 

the state’s occupancy standard results in a lower rate of $17.91 

($200,000/[.85 x 36 beds x 365 days]). The extent to which states apply 

occupancy standards varies. Three of the states we reviewed—Alabama, 

Arkansas, and Iowa—apply the occupancy standard to only one cost 

center, and 7 others—Connecticut, Florida, Massachusetts, Michigan, New 

York, Rhode Island, and South Dakota—apply the occupancy standard to 

all cost centers (see table 11). 

 9

The two states reviewed that did not incorporate occupancy standards into their nursing 

home payment methods were California and Oregon. 

Occupancy Standards 
Appendix II: Summary of Certain Payment 

Characteristics Used in Selected States 

Page 42 GAO-04-143 Medicaid Nursing Home Payments 

Table 11: Occupancy Standards Used in Reviewed States, as of June 2003 

State Standard Applicable cost center(s) 

Alabama 85 percent occupancy Capital 

Arkansas 75 percent occupancy Capital 

Colorado 85 percent occupancy Administrative (rural facilities exempted) 

 90 percent occupancy Capital 

Connecticut 95 percent occupancy All 

Florida Home’s total occupancy must be below the statewide average 

occupancy less one standard deviation and home’s Medicaid 

occupancy must be below the statewide average Medicaid 

occupancy less one standard deviationa

 

Allb

Illinois 93 percent occupancy Indirect care/administrative and capital 

Iowa 80 percent occupancyc Indirect cared

Massachusetts 96 percent occupancy All 

Michigan 85 percent occupancy All 

New Jersey 95 percent occupancy Capital 

 90 percent occupancy Direct resident care, indirect care, and 

administrative 

New York 90 percent occupancy All 

North Dakota 90 percent occupancy Administrative and capital 

Pennsylvania 90 percent occupancy Administrative and capital 

Rhode Island 98 percent of statewide average occupancy All 

South Dakota 3 percent below the statewide average occupancy All 

Texas Lower of 85 percent occupancy or statewide average 

occupancy 

Administrative and capital 

Vermont 90 percent occupancy All except direct resident care 

Source: State Medicaid programs. 

Note: Unless otherwise noted, the state’s occupancy standard is expressed as a minimum 

percentage of the number of beds occupied each day in a nursing home over a given year. 

a

In Florida, these figures are revised semiannually, based on updated census data provided by the 

nursing homes. The amount that a home’s per diem rate is reduced depends on its actual occupancy. 

b

Florida does not apply the occupancy standard to the property component of capital in the 

approximately 90 percent of nursing homes that are reimbursed for capital using a fair rental value 

system. 

c

Iowa’s occupancy standard increased to 85 percent on July 1, 2003. 

d

Within the indirect care cost center, Iowa only applies its occupancy standard to administrative and 

capital costs. 
Appendix III: Changes to Nursing Home 

Payment Methods or Rates in 19 States 

Page 43 GAO-04-143 Medicaid Nursing Home Payments 

Officials in the states we reviewed identified changes to payment rates or 

to the methods their respective Medicaid programs use to determine 

nursing home payment rates from state fiscal years 1998 through 2004 (see 

table 12). While some changes have obvious positive or negative effects on 

payment rates, the effect of other changes can be mixed. For example, 

while Colorado’s elimination of its quality incentive add-on payment likely 

lowers payment to some nursing homes, payment to some nursing homes 

in Vermont increased because of recently implemented add-on payments 

for direct resident care staff wages. The effect of other changes, such as 

California adding two counties to the Bay Area peer group in 2002, are 

likely to affect rates in both directions for different homes. 

In addition to changes to how they paid nursing homes, two states—

Arkansas and Iowa—designed and implemented completely new payment 

methodologies during this time. For example, Iowa’s prior payment 

method did not classify homes into peer groups, did not adjust rates for 

the costs related to homes’ resident care needs, and limited payment to the 

70th percentile of all homes’ total costs. Under the state’s new payment 

method, which was phased in completely in July 2003, homes are 

classified into peer groups, rates are adjusted for resident care costs using 

the RUG-III classification system, and a ceiling of 120 percent of median 

costs for all homes is imposed on payment for direct resident care costs. 

Appendix III: Changes to Nursing Home 

Payment Methods or Rates in 19 States 
Appendix III: Changes to Nursing Home 

Payment Methods or Rates in 19 States 

Page 44 GAO-04-143 Medicaid Nursing Home Payments 

Table 12: State-Reported Changes to Existing Nursing Home Payment Methods or Rates, State Fiscal Years 1998-2004 

State 

Peer 

grouping 

Cost-center 

ceilings or 

efficiency 

incentives 

Calculation of 

costs 

Case-mix 

classification 

system 

Occupancy 

standard 

Inflation 

factor 

Add-on 

payments 

Payment 

rate 

Alabama Moved liability 

insurance 

costs to 

administrative 

cost center 

instead of 

pass-through 

in 2002 

 

California Added 

two 

counties 

to Bay 

Area peer 

group in 

2002 

 Implemented 

a wage addon for some 

direct 

resident care 

staff in 1999 

and for other 

staff in 2000;a

delayed 

implementation of 

another direct 

resident care 

wage add-on, 

which will 

apply to 

payments 

from 

February 

2002 through 

July 2004, 

until 

December 

2004 

Froze per 

diem rates 

from August 

2003 

through 

July 2005 at 

August 2003 

levels 

Colorado Suspended 

efficiency 

incentive in 

administrative 

cost center for 

3 months in 

2003 

Eliminated limit 

on annual 

increase in 

payment for 

combined 

direct and 

indirect care 

costs in 2000 

Implemented 

case-mix 

system in 

2000 

Eliminated 

occupancy 

standard in 

direct 

resident 

care and 

indirect care 

cost centers 

in 2000 

 Eliminated 

quality 

incentive addon in 2002 

Increased 

lag time 

between 

cost report 

submission 

and rate 

implementation from 2 

to10 months 

for most 

homes in 

2002 
Appendix III: Changes to Nursing Home 

Payment Methods or Rates in 19 States 

Page 45 GAO-04-143 Medicaid Nursing Home Payments 

State 

Peer 

grouping 

Cost-center 

ceilings or 

efficiency 

incentives 

Calculation of 

costs 

Case-mix 

classification 

system 

Occupancy 

standard 

Inflation 

factor 

Add-on 

payments 

Payment 

rate 

Connecticut Implemented 

direct 

resident care 

and indirect 

care staffing 

wage add-on 

in 1999; 

eliminated in 

2001 

Delayed rate 

increase from 

July 2002 

until January 

2003; froze 

rates at 

January 2003 

levels through 

December 

2004 

Florida Eliminated 

peer group 

and homespecific 

ceilings for 

indirect care 

from January 

to June 2002 

and for direct 

resident care 

beginning 

January 2002 

Partially 

rebased 

administrative 

cost center for 

state fiscal 

year (SFY) 

2003 

Implemented 

case-mix 

system in 

1999; 

eliminated in 

2001 

 Implemented 

direct 

resident care 

staffing 

minimum 

add-on in 

2002; 

delayed 

increase in 

direct 

resident care 

staffing 

minimum 

from January 

until May 

2004 

Illinois Eliminated 

routine 

updates to 

case-mix data 

from 1998 

through 2001 

and 

eliminated 

case-mix 

updates 

altogether in 

2002;b

implemented 

new case-mix 

system based 

on the CMS’s 

Minimum 

Data Set in 

SFY 2004 

 Froze rates 

for SFY 1998 

through 

2001;b

 cut 

rate by 5.9 

percent in 

SFY 2003; 

froze rates at 

SFY 2003 

levels in SFY 

2004 
Appendix III: Changes to Nursing Home 

Payment Methods or Rates in 19 States 

Page 46 GAO-04-143 Medicaid Nursing Home Payments 

State 

Peer 

grouping 

Cost-center 

ceilings or 

efficiency 

incentives 

Calculation of 

costs 

Case-mix 

classification 

system 

Occupancy 

standard 

Inflation 

factor 

Add-on 

payments 

Payment 

rate 

Iowac Increased 

from 80 to 

85 percent 

in indirect 

care cost 

center in 

SFY 2004 

Reduced 

cost report 

inflation 

factor by 3.4 

percentage 

points in 

SFY 2004 

Implemented 

add-on 

payment for 

quality in 

July 2002 

Massachusetts Decreased 

ceilings for 

direct resident 

care, indirect 

care, and 

administrative 

cost centers in 

1998 

 Implemented 

certified 

nursing 

assistant 

wage add-on 

in 2000; 

implemented 

two one-time 

add-on 

payments for 

nursing home 

performance 

and for 

nursing 

homes to 

meet 

Department 

of Mental 

Retardation 

requirements 

in SFY 2004 

Reduced per 

diem rates by 

roughly 2.6 

percent from 

March 

through June 

2003d

Michigan Changed 

inflation 

factor used 

to adjust for 

time 

between 

cost report 

submission 

and rate 

implementation from 

SNF market 

basket index 

to 

legislatively 

determined 

factor in 

1999 

Eliminated 

quality 

incentive addon in 1999; 

eliminated 

direct 

resident care 

staffing wage 

pass-through 

in 2000 

Reduced per 

diem rates by 

approximately 

1 percent for 

9 months in 

2002;e

reduced per 

diem rates by 

approximately 

1.85 percent 

for 7 months 

in 2003;e

changed 

beginning of 

rate year from 

start of each 

home’s fiscal 

year to start 

of state fiscal 

year in SFY 

2004 
Appendix III: Changes to Nursing Home 

Payment Methods or Rates in 19 States 

Page 47 GAO-04-143 Medicaid Nursing Home Payments 

State 

Peer 

grouping 

Cost-center 

ceilings or 

efficiency 

incentives 

Calculation of 

costs 

Case-mix 

classification 

system 

Occupancy 

standard 

Inflation 

factor 

Add-on 

payments 

Payment 

rate 

New Jersey Increased 

direct resident 

care costcenter ceiling 

in SFY 2002; 

decreased 

indirect and 

administrative 

cost-center 

ceilings in 

1999 

Recategorized 

costs included 

in certain cost 

centers in 1999

 Increased 

from 85 to 

90 percent 

in direct 

resident 

care, 

indirect 

care, and 

administrative cost 

centers in 

2000;f

decreased 

from 90 to 

85 percent 

in direct 

resident 

care, 

indirect 

care, and 

administrative cost 

centers in 

2003 

 

New York Added direct 

resident care 

staffing wage 

add-on in 

2002 

North Dakota Decreased 

direct resident 

care costcenter ceiling 

in SFY 2004 

 Changed the 

version of the 

RUG system 

used in 1999 

 Provided staff 

wage and 

benefit addon from 2001 

through 2003g

Oregon Froze rates at 

SFY 2002 

level for 

SFY 2003; 

extended 

freeze in 

SFY 2004h
Appendix III: Changes to Nursing Home 

Payment Methods or Rates in 19 States 

Page 48 GAO-04-143 Medicaid Nursing Home Payments 

State 

Peer 

grouping 

Cost-center 

ceilings or 

efficiency 

incentives 

Calculation of 

costs 

Case-mix 

classification 

system 

Occupancy 

standard 

Inflation 

factor 

Add-on 

payments 

Payment 

rate 

Pennsylvania Changed 

payment of 

major movable 

property costsi

to a passthrough 

instead of 

including in the 

indirect care 

cost center in 

2001 

 Delayed rate 

adjustments 

pending 

legislative 

action in 

SFY 2004 

Rhode Island Implemented 

pass-through 

for direct 

resident care 

costs in 

SFY 2002 

South Dakota Eliminated 

peer 

groups in 

SFY 2000 

Decreased 

payments for 

certain homes 

in the direct 

resident care, 

indirect care, 

and 

administrative 

cost centers 

from 

SFY 2000 

through 2002j

 Implemented 

nurse’s aide 

wage passthrough in 

SFY 2003 

Inflated rates 

instead of 

rebasing in 

SFY 1999; 

limited annual 

increase in 

overall 

payment rate 

to 8 percent 

in SFY 2000; 

inflated rates 

instead of 

rebasing in 

SFY 2004 
Appendix III: Changes to Nursing Home 

Payment Methods or Rates in 19 States 

Page 49 GAO-04-143 Medicaid Nursing Home Payments 

State 

Peer 

grouping 

Cost-center 

ceilings or 

efficiency 

incentives 

Calculation of 

costs 

Case-mix 

classification 

system 

Occupancy 

standard 

Inflation 

factor 

Add-on 

payments 

Payment 

rate 

Texas Incorporated 

payment for 

enhanced 

staffing 

program in 

direct 

resident care 

cost center 

for 

participating 

facilities in 

2000 

Implemented 

a requirement 

that homes 

spending less 

than 85 

percent of the 

direct resident 

care rate on 

staffing 

wages and 

benefits 

refund the 

difference 

between this 

amount and 

their costs in 

SFY 2000; 

eliminated in 

SFY 2004; 

rebased 

biennially and 

inflated rates 

to the midpoint of the 2-

year period 

instead of 

rebasing 

annually in 

SFY 2002; 

cut rates by 

1.75 percent 

and 

eliminated 

rate rebasing 

and inflation 

update in 

SFY 2004 

Vermont Changed casemix system to 

include acuity 

of Medicaid 

residents only 

in 1998 

Eliminated 

90 percent 

occupancy 

standard 

from direct 

resident care 

cost center 

in SFY 2003

 

Source: State Medicaid programs. 

Note: Information provided by states is current as of September 2003. Unless noted as SFY, years 

indicated in the table refer to the calendar years that specific changes were made or implemented. 
Appendix III: Changes to Nursing Home 

Payment Methods or Rates in 19 States 

Page 50 GAO-04-143 Medicaid Nursing Home Payments 

a

These California add-on payments are integrated into nursing home cost reports and eventually 

become part of the regular per diem rate calculation. The add-on payments are phased out after all 

homes have the add-on included in their rates. 

b

Illinois did not routinely adjust for case-mix or consistently update rates from 1994 through 2001. 

However, the state did adjust rates periodically for inflation based on budget availability. 

c

Iowa completed the phase-in of a new payment methodology, which included a case-mix adjustment 

system and peer groups, in July 2003. 

d

This reduction was implemented as a 6.5 percent cut to Massachusetts’ payments for nursing 

homes’ indirect care and administrative costs. 

e

These reductions applied to Michigan’s payments for nursing homes’ direct resident care, indirect 

care, and administrative costs but not to payments for capital costs, so the overall reduction to 

homes’ per diem rates was somewhat less than 1 percent in 2002 and somewhat less than 1.85 

percent in 2003. 

f

New Jersey did not apply the occupancy standard to nursing homes with occupancy from 85 through 

90 percent if their previous year’s occupancy was 90 percent or greater. 

g

North Dakota eliminated this add-on payment in 2003, when the costs of the increased staff salaries 

and benefits funded by the add-on became part of the regular per diem rate calculation. 

h

Oregon’s rate freeze will remain in effect, pending CMS approval of a waiver proposal pertaining to 

the state’s new provider tax. 

i

In Pennsylvania, major movable property costs include tangible items costing $500 or more that are 

used to provide services to nursing home residents and could include beds and office equipment. 

j

Decreased payments affect South Dakota nursing homes that have costs above 115 percent of the 

median in the direct resident care cost center or above 105 percent of the median in the indirect care 

or administrative cost centers. 
Appendix IV: GAO Contact and Staff 

Acknowledgments 

Page 51 GAO-04-143 Medicaid Nursing Home Payments 

Susan Anthony, (312) 220-7666 

Christine DeMars, Behn M. Kelly, Sari B. Shuman, Margaret Smith, and 

Christi Turner made key contributions to this report. 

Appendix IV: GAO Contact and Staff 

Acknowledgments 

GAO Contact 

Acknowledgments 
Related GAO Products 

Page 52 GAO-04-143 Medicaid Nursing Home Payments 

Nursing Home Quality: Prevalence of Serious Problems, While 

Declining, Reinforces Importance of Enhanced Oversight. GAO-03-561. 

Washington, D.C.: July 15, 2003. 

Medicaid Formula: Differences in Funding Ability among States Often 

Are Widened. GAO-03-620. Washington, D.C.: July 10, 2003. 

Nursing Homes: Quality of Care More Related to Staffing than Spending. 

GAO-02-431R. Washington, D.C.: June 13, 2002. 

Medicaid: HCFA Reversed Its Position and Approved Additional State 

Financing Schemes. GAO-02-147. Washington, D.C.: October 30, 2001. 

Nursing Workforce: Multiple Factors Create Nurse Recruitment and 

Retention Problems. GAO-01-912T. Washington, D.C.: June 27, 2001. 

Nursing Workforce: Recruitment and Retention of Nurses and Nurse 

Aides Is a Growing Concern. GAO-01-750T. Washington, D.C.: May 17, 

2001. 

Long-Term Care: Baby Boom Generation Increases Challenge of 

Financing Needed Services. GAO-01-563T. Washington, D.C.: March 27, 

2001. 

Medicaid: State Financing Schemes Again Drive Up Federal Payments. 

GAO/T-HEHS-00-193. Washington, D.C.: September 6, 2000. 

Medicaid Formula: Effects of Proposed Formula on Federal Shares of 

State Spending. GAO/HEHS-99-29R. Washington, D.C.: February 19, 1999. 

Long-Term Care: Baby Boom Generation Presents Financing Challenges. 

GAO/T-HEHS-98-107. Washington, D.C.: March 9, 1998. 

Related GAO Products 

(290201) 
The General Accounting Office, the audit, evaluation and investigative arm of 

Congress, exists to support Congress in meeting its constitutional responsibilities 

and to help improve the performance and accountability of the federal 

government for the American people. GAO examines the use of public funds; 

evaluates federal programs and policies; and provides analyses, 

recommendations, and other assistance to help Congress make informed 

oversight, policy, and funding decisions. GAO’s commitment to good government 

is reflected in its core values of accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost is 

through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and fulltext files of current reports and testimony and an expanding archive of older 

products. The Web site features a search engine to help you locate documents 

using key words and phrases. You can print these documents in their entirety, 

including charts and other graphics. 

Each day, GAO issues a list of newly released reports, testimony, and 

correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site 

daily. The list contains links to the full-text document files. To have GAO e-mail 

this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail 

alerts” under the “Order GAO Products” heading. 

The first copy of each printed report is free. Additional copies are $2 each. A 

check or money order should be made out to the Superintendent of Documents. 

GAO also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a 

single address are discounted 25 percent. Orders should be sent to: 

U.S. General Accounting Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm 

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202) 512-4800 

U.S. General Accounting Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

GAO’s Mission 

Obtaining Copies of 

GAO Reports and 

Testimony 

Order by Mail or Phone 

To Report Fraud, 

Waste, and Abuse in 

Federal Programs 

Public Affairs